On The Brink with Castle Island - Dick Bove (Odeon Capital) on the banking sector and the future of dollar dominance (EP.116)

Episode Date: August 24, 2020

Dick Bove, senior research analyst at Odeon Capital Group joins the show. In this episode we discuss: Dick's 52 year career as a research analyst and his path to covering the banking sector The 2008 financial crisis, the measures that were taken, and how this has impacted the banking industry The future of dollar dominance and the rise of China on the geopolitical stage The role of cryptocurrency and the state of awareness in the institutional world Dick's favorite books and his perspective on the research industry To learn more about Odeon Capital and to access Dick's research visit www.odeoncap.com

Today on the podcast, I had the great pleasure to speak with Dick Bavé, the chief strategist at Odeon Capital. Dick has been a research analyst for 52 years, and he's built a reputation for being one of the foremost experts in the banking industry. I've been a consumer of Dick's research for a number of years, and I wanted to have him on the podcast because I read a note last week that he wrote around the dollar's status as the world's reserve currency. And it clearly articulates what's going on in the world right now with the U.S. printing an exorbitant amount of money. and around some of the threats to the dollar supremacy on a global scale. Dick is also someone who's been really early to the world of digital currency.

He's famous for a call that he had on Bitcoin back in 2013 when it was trading at $50. And I think a lot of people probably wish they were listening to him back then. So this one was a really enjoyable conversation for me. It was a real treat. I hope you enjoy it too. So without further ado, here's my conversation with Dick Bavet. Brought down by Bad Mortgage Investments, Lehman, which has 25,000 employees will be liquidated.

The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin.

Bitcoin. Thanks so much for joining a podcast. I've actually been a reader of your research for a number of years dating back to when I was just coming out of undergrad and the great financial crisis was starting. And so I want to get your perspective on a number of topics today. But as a way to jump off, I was hoping that you could just give the listeners a quick introduction of your background and what you're doing now. Well, either fortunately or unfortunately, I've been in this business since 1965. And I've been an analyst virtually the whole period. I followed in the beginning, there was a housing. boom in 1970, so I was deeply involved in following that. And then by 1980, I decided that the housing industry was no longer attractive for any reason. And I switched over to banking, so I've been following that sector, I'd say for almost 40 years. I have worked always on the cell site, except for a couple of month period on the by side. And I've been fortunate enough, I guess, to be interviewed G over 1,600 times on this continent and other continents about banking,

finance, et cetera. And what was it that drew you to financial services and banking as a focus area? You could have focused on any industry. I think what attracted me was that the building industry depended upon the financial industry for its survival. In other words, these building booms, which people think are driven by demand, generally speaking, are driven by the supply of money. And therefore, I thought if money was that important to building,

it probably was that important to the whole economy, and therefore I wanted to be where the money was being utilized, created, and what have you. That's really interesting. I'd imagine that from your purview, the banking industry has just changed a lot over the past few decades. Would have been the biggest changes that you've noticed? Well, I think the thing that has changed most is that the banking industry clearly is an old economy industry.

And by that I mean that the primary product that the bank sell is loans. And loans are associated with some fixed product, like a machine, a building, a piece of land, an automobile, a car, a computer, what have you. And those sectors are not growing terribly rapidly. In fact, many of them are not growing at all. So the net effect is the banking industry itself

has lost all of its forward momentum, and that's very, very negative. Where the banks have a tremendous advantage over everyone else is they have FDIC insurance. Now, people don't think of that as this enormous advantage, but it is because it allows banks to borrow money at the lowest cost of any entities in the world. It borrows money at a lower cost than the government. So banks will always make money. They'll always make a lot of money. It's just I think the key differences, they're not going to grow very rapidly.

That's interesting. And is that comment around them not growing very rapidly a function of the regulatory environment? What do you attribute that to? I attribute it to what I guess a lot of people would call a fourth industrial revolution. If, in fact, computers are capable of doing 150 billion flooding operations per second, all of a sudden, everything that is done in banking can now be done, in faster form, in better form, outside of banking, although the banks are doing a tremendous amount to catch up.

So the net effect is banking is now competing heavily for the businesses that it had, plus it has no control over the price of anything that it sells. If the government is going to set interest rates, that it has no control over the price of loans, which is its primary product. And if there are going to be things like what you guys are doing, in what is happening with exchange traded funds, then that causes a real pricing dilemma for asset management funds, for brokerage firms, for commissions, for investment banking,

for every product that's being sold. So now you have an industry in a slow growth sector with no control over its pricing. That's not terribly feeling. That's well put. As you were answering that question, I was thinking back to my days at Fidelity. We used to call this the new front door to financial service. services, this idea that a lot of the things that banks and brokerages are doing can effectively be intermediated at some point maybe by a technology company. And you see these fintechs moving

into the space now. How much of a threat do you see that to the traditional banks right now? Because of the laws of the land, it's going to be very difficult for commercial companies to invade banking. In other words, the law says you have to take deposits and make loans to be a bank and you cannot be owned by a commercial company. So if a fintech wants to invade this area, it's going to have to give up everything it's doing other than those two functions. And that may be difficult for them to do. Number one, plus the fintechs just don't have enough money to compete.

In other words, if you've got J.P. Morgan putting literally tens of billions of dollars into the creation of superior technology in the financial services industry, you don't have any fintech that comes close to that. One of the things that really drew me to your research when I first kind of heard of you was just the fact that you have this ability to make complex things very easy to understand. And to me, the complexity in the banking sector is just off the charts. In fact, I'm paraphrasing now, but I had read this book about Charlie Munger, and he talks about just very few people in the world can actually digest the financial statements of any given

bank and actually understand it, which is why management is so important. So how do you think about just the rising complexity? And I'm curious if you even agree that it's rising in complexity. Actually, I don't. I think banking is very simple. The reason I say that is because if you think of the bank as being no different from a commercial company, then you can say, okay, it takes in raw material, which is money, cash. It then takes that raw material, remunufactures it, which would be underwriting, and it produces a product, which is a loan. But it develops skill sets in doing that. The skill set it takes is it knows how to attract funds. So that can be used in asset management. It can be used in investment banking. The manufacturing process, which is

underwriting, can be used in analyzing a wide variety of investments. The end product being loans can be seen as the managed mutual fund product or the investment banking product, which has been created. So if one sticks to those same parameters as you would for General Motors or a semiconductor company or what have you, banking doesn't become that complex. What makes it complex is that there are myriad methods of doing these simple tasks. And those myriad methods are made available by the incredible. increase, as we just mentioned, in computerization and the ability of computers to handle massive amounts of very small data very rapidly in a very error-free environment. That's what

allows banks the freedom to create complex products. But they all come back to that same taking money, remanufacture it, and sell it. That's what they're all about. That's well put. You can really look at that value chain. I'm curious to dig a little bit into that investment banking and maybe the derivative side of this. So if you look at the 2007, 8, 9 time frame and what happened with the mortgage crisis and the banks and sort of the moves that were made by the regulators and what the banks did coming out of that crisis, what's your impression with how that was all handled and how the banks were situated coming out of the crisis? By the way, that's a perfect example of the manufacturing process dominating the industry

because what happened, they created, if you will, a lot of the crisis, by the meaning of the crisis was created over money, creation, et cetera. But if you look at what happened as a result of the huge increases in technology, you were able to create CLOs, CDOs, CDO squared, CDOs, Q, you were able to create CDS's, you were able to hedge, do a whole variety of things

because of the technology. What happened as a result of the collapse is, I think, some good and some really bad. There was a huge panic. In other words, Congress totally panicked. Plus, it had no clue as to what had happened or what to do about it. So it relied on a very small number of people, one from Massachusetts and the other from Connecticut, who basically drove the situation to a bunch of congressmen and women who had only one goal. And that goal was fix it. I don't care what you do, but fix it. We don't know how to fix it. You know how to fix it. We'll do what you say. So there were a lot of things that were done that should have been done in terms of increasing the capital of the banks, you know, restraining the use of technology and the

creation of product, the ability to better underwrite the customer. All that was good. The bad is that the industry is now socialized. In other words, we talk about a big debate is the United States is moving to socialism. That's only being stated by people who don't realize that we're already there. I mean, that is, if we take a look at the financial system, housing being the most important, housing finance is totally controlled by the U.S. government, every aspect of it. Banking now is also totally controlled by the government. The banks are told how much capital they must have. They can't go above it.

They can't go below it. They're told how that capital must be allocated on the asset side of the balance sheet. They must have a certain amount of liquidity, certain amount of loans, certain amount of, let's say, fixtures or other things. They're told how to allocate the money in liquidity. I mean, how much treasuries do you have to own

what they like to call high quality liquid assets, how much non, if you will, government guaranteed liquidity you can own. They look at the loan portfolio and they tell the banks what they can loan to and what they cannot loan to. And then they go to the other side of the balance sheet and they tell the banks, you can't have too much short-term borrowings because that creates risk. You've got to have a lot more common equity, which I think is very important, very true.

And you have to have a lot of long-term. long-term debt. So the government is telling the bags everything about how they structure their companies and they're telling them how much dividends they can pay and they're telling them what interest rates they can charge and they're telling them what loans they can or cannot make. If that isn't socialism, it's damn close to it. And I guess if you're the regulators and if you're a politician, you're probably arguing that, look, we had to bail you out and so this is just the way things are. But I'm curious, what would your perspective be if you were in the management at one of these large commercial banks or large global banks even? Is there a strategic imperative that can change the course of this direction that we're on with the banking sector?

If you go back to the fact that they take in money, they remanufacture it, and they make loans, nothing is going to change. In other words, they're still going to be going to be trying to figure out how to remanufacturing for the highest return. and they're still going to be making loans. So they're still going to be totally dependent upon the ability of the economy to generate income and the ability of the economy to make use of that income, in, if you will, building things, buying things, what have you. So the core factors don't change. What is annoying to people like myself is don't want the government to tell us how to do it.

We'd rather do it without the government telling us, but we've proven that we can't do it on our own because we make big mistakes. But the fact of the matter is, I would still prefer to make our mistakes instead of the government making the mistakes for us. And do you see big differences in the way that the European banks were shored up coming out of the financial crisis versus the U.S. banks? Are they demonstrably different in terms of how capitalized or how well positioned there? There was a staggering difference.

And the difference is in the United States, and this goes back to the beginning of banking, in this country, if banks run in trouble, the government is very clear, get out of the business or get more capital and get rid of the bad loans. It's very simple. But if you get a lot of bad loans, either get the capital to write them off and write them off immediately or get out of the business. In Europe, they don't do that. They say, okay, let's make believe these loans are still good. And therefore, you don't need capital and you don't have to go raise a lot of money and you don't have to do anything dramatic. So by, if you will, subsidizing the, if you will, non-earning portions of the balance sheet, they weaken the earnings capacity of the European

banks. And by the way, this is true in China. This is true in India. This is true all over the world, the U.S., Great Britain, they are definitely distinct from the rest of the world in this regard, which is why our banks are definitely superior to the banks that we have in these countries where they're subsidizing inefficiency. I guess that's the amend and pretend way of banking. If you look at just the impact so far of this COVID-19 global pandemic on the banking sector, how is the U.S. banking system positioned right now? And as an investor, what should investors be aware of?

This is always something which clearly bothers people. But COVID was a gift from heaven to the financial industry. In other words, you've got the Federal Reserve creating $2.9 trillion additional assets on its balance sheet and not having any effective method of shoveling that money into the economy. So it's gone into the financial industry. and the financial industry is benefiting enormously from it. In other words, you've seen all financial asset classes benefiting enormously from it. Huge increases in profits for the elements that are in the financial industry.

So banks were part of that. I mean, the banks are receiving unbelievable amounts of money. You've got M2 growing. At one point, it was growing at 25%. Now, again, in 1980, the definition of money, in the United States changed. But the fact is that from 1980 to the present, you've never seen money supply growth at this rate.

At one point, M1 was growing in 50%. So where does that money go? It goes right into the banks. And what is that money? It's deposits. And what does the bank pay for that money? Nothing. All right?

So the bank is getting all this free money from the government, from the Federal Reserve, I should say. And as a result of that, it allows their earnings to stabilize. The problem that the banks have to deal with is a lot of these loans go bad. And therefore, they had to set up reserves for the loans that went bad. And that's where the problem arises.

But the banks will emerge from COVID-19 in much, much stronger condition with much, much more in financial power. And therefore, it was not negative for them. I guess there's a couple things I'd love to dig in based on that answer. one is just how does the duration of this pandemic impact the health of the banks? I mean, it would be one thing if this was over with a vaccine in January. It would be an entirely different thing if we had to go another full year of people being out of work. I think presumably you'd have more defaults on mortgages and things like that in that type of a scenario. So when you look at this, do you think around just timeframes to a vaccine?

How do you think about that? I think that, again, this is going to surprise you. longer it lasts, the more the banks are going to get control of the financial system. Because, again, we've got to go back to FDIC insurance. To the degree that the economy runs into trouble and you see failures cropping up everywhere, people will panic and they will take their money out of everything and put it in the place where they know, and by the way, I'm going to put no in quotes, that that money will be safe and paid back, all right, because the government is guaranteeing it.

And the fact that the government cannot guarantee $15 trillion in deposits, we'll forget that, all right, because the population believes that it can. So the net effect is what will happen if this thing extends out is the banks will get hit with huge amounts of loan losses, which they'll absorb, all right, because they'll get these deposits coming in. The non-banks will fail. the fintechs will go away. All of the commercial consumer finance companies will be gone.

And therefore, all of the money, all of the lending will come under the control of the banking industry. Plus, it won't be under the regional banks or the community banks. It'll be under the biggest banks in the United States. So the concentration in financial power that an extensive COVID virus will, create will be staggering and it will, I guess, validate the fact that the government controls every aspect of the banking industry. Yeah, that's very clearly articulated. I guess there's a huge political angle here, too, with everything that you're saying

around the inflation and the value of just financial assets, because the people that tend to own these financial assets are the ones that are more affluent. And this money printing really does not benefit the wage earner in the same way that it would benefit the property owner, for instance. So as you look at just the political realities of this situation, and as we head into an election year, how do you handicap sort of the range of outcomes that would happen under a Biden regime versus four more years of Trump? There'll be a bunch of minded changes if the Biden people get in.

In other words, when Trump got in, what he did was we've got a plethora of regulatory agencies. So I'm just going to use the acronyms. The FSOC is now headed by a Trump guy, and all the directors of the FSOC, and that's the most important one, are Trump people. The FDIC is all Trump. The OCC is all Trump. The Federal Reserve is all Trump. The CFTC is all Trump. The Labor Department, the HUD, the FHA, the FHFA.

I don't care what the group was. Trump removed all the Democrats. the anti-bank people, and he put in all of the people who are either bankers are associated with banks. And what these people did was since Congress wrote the Dodd-Trank Act in very broad general terms, in other words, let me step aside for a second. The Dodd-Frank Act basically says, we want you to create safe and sound banks. Now, you go do it. So when you had a bunch of Democrats in there that were anti-banking,

they did it by putting a whole bunch of draconian, if you will, requirements, which we mentioned. What Trump did was he put in a whole bunch of people who were bankers, and they have been gradually easing those draconian requirements. If the Biden people come in, they will tighten the draconian environments. They'll tighten a lot of the rules, and they'll affect the cost of running a bank, and in a minimal fashion, they'll affect the profitability of the banks. basically we'll have minor things done around the edges, but nothing at the core. The core is get the money and lend it.

That's the game. And you've spoken at length around the politicization of the Federal Reserve. How do you see that playing out over the next few years? I mean, are we sort of at the point where there's not much more the Fed can do that they've already been so active here? How do you see this playing out? If you go back to when the Federal Reserve was created in 1913, by a bunch of guys from Massachusetts and New York also.

But the point is, when it was created, the greatest fear that the nation had was that these bankers were setting up this entity to give it greater control of the financial system and the economy. And therefore, they put the Secretary of the Treasury and the head of the OCC as permanent board members on the Federal Reserve. Well, it turned out that when we got to the Depression, These guys blew it. I mean, Andrew Mellon had been the longest serving Treasury Secretary in the country's history,

just thought that the Depression was a momentary event that would be blown over. So then Congress came in and they changed the structure, reduced the power of the New York branch of the Federal Reserve, and they created this entity that was supposedly not going to be controlled by the bankers or by the government. The problem is that Roosevelt, Truman, Eisenhower, all these presidents, Johnson, none of them believe that the Fed was supposed to be independent. Not one of them. Nixon maybe was the most extreme example, but they did not believe that the Fed should be independent. And all of a sudden, in the era of Kennedy and Bush, they took their hands off the Fed. Trump comes along and he follows the same rules as we'll say the Democrats coming out of the Depression.

This is not an independent entity. You do what the public wants. So I think that the Fed will always be owned by the government. I'm going to go a step further. It should be. I believe that setting up all these agencies which are immune to the will of the people is a huge mistake. And I think, therefore, that the Fed should not be independent. Clearly, under Powell, it is not independent.

Six of the seven people there are put in by Trump. And Powell is a Trump person, whether Trump thinks he is or not. But the fact of the matter is, the Fed historically was not meant to be independent. It should not be independent, and it isn't independent. And I guess this lack of independence is driven home by the fact that you can see this on Twitter periodically, just how it's not independent. So I didn't want to have you on this podcast just to talk about Bitcoin, but as I was preparing for the podcast, I came across this 2013 research note that I totally forgotten about where

you talk about Bitcoin. And I'm going to read the quote here, which is really prescient. So you said the demand for new currencies is so compelling in a world where fiat currencies are so easily manipulated by central banks and financial systems. And they're proven to be fragile that these currencies keep growing. So the price of Bitcoin when you said this was $50, and you were calling it compelling back in 2013. This was not common back then. So what did you see back then that others didn't?

It wasn't that I was pressured or anything. It was the fact that the amount of upset over the handling of the value of the dollar has always been around forever. And it continued. But what was really happening was when you came out of World War II, there were no account. that could support independent currencies because they had been devastated by the war. So all of a sudden, the dollar jumps into a prime position and becomes the world's reserve currency. Now, five years ago, seven years ago, basically that was no longer the case. You had a whole bunch of nations that were actually in better condition financially than the United States

that had the ability to support currencies. And therefore, that was one issue. You didn't need the dollar the way you needed it before. The second was that the dollar had become a digital currency. In other words, I remember clearly one time I was talking to the CFO of what was then Warcovia Bank, and I was saying, and he really got upset with this, I said, where's my money? I said, if I go down to the vault, can I find my money? Because that was my bank at the time also.

And he really got upset because you couldn't go down to the vault and find the money. The money was digital. It's still digital. All the money is digital. So the fact that there was going to be digital currencies created in a world in which there was competing financial systems being developed made it seem very likely that these digital currencies would succeed because the dollar is a cryptocurrency, whether people want to admit it or not.

As I say, go to your bank, go ask your bankers, where's my money? It's not there. So building on that kind of digital currency track, so I totally agree that all dollars are effectively digital in the first place, in 2008 with the invention of Bitcoin and I guess 2009 when it was actually put into the wild, we really had this first time that you could have a digital currency that is not controlled by one entity. It's essentially open source software that anyone can hold. people compare it to a digital gold in that way, in a sense that no one person owns it.

So when you think about Bitcoin and cryptocurrencies that are non-sovereign, are you a believer in this? Do you think that this is an enduring phenomenon? Yeah, no, I do. I think that the industry has evolved, as you're well aware, enormously from that standpoint. I mean, it's now been actually sub-segmented. You've got the token people, you've got the blockchain people, and you've got, I guess, this whole derivative type of product people so that it's evolving. And as long as there are large groups of users, it'll continue to evolve and it'll continue to grow. And it's not going away. I mean, we need price to come back and drive the money changes out of the temple because we're going to have multiple currencies, paper, metal,

digital, that are going to compete with each other, that are going to be arbitrated between each other. And I think that that's where we're going and that's not going to change. It's great to hear you say that. Hopefully you're right. When I think back to when I started working on blockchain technology and Bitcoin when I was at Fidelity in 2014, we had some really forward-thinking senior leadership at Fidelity that was interested in at least just seeing if there was something here. I wouldn't say that everyone was sold on it right away, but there was really an R&D culture. But writ large, I would go to these events in New York and talk to other banks and brokerage firms. And they just thought that I was crazy back that. There was really

no one with high reputation in this industry yet. But now you see Fidelity has launched a custody platform. Paul Tudor Jones is openly talking about deploying capital into Bitcoin. And you see a lot of institutions just ramping up that R&D. So from where you sit, what's your perception of the institutional awareness of cryptocurrencies and blockchain technology? It's well underway. And we can take Jamie Diamond, the head of J.P. Morgan Chase, a few years ago, he said it's a fraud. Now he has major investments, I believe, in Ethereum and in XRP. I'm not sure, but I think that's where he's gone.

So not only has he gone away from it being a fraud to it being viable. And if you take a look at companies like BNY Mellon, they have their own cryptocurrency. If you take a look at a whole bunch of financial companies, they've developed their own cryptocurrency. So they are part of the competition for what is going to be around. And the issue to me is not are the digital currencies going to be there, but who can survive? In other words, which digital currencies are going to be there? Are they going to be asset-backed digital currencies in some fashion? Are they going to be pure digital in other fashions?

I don't have a clue. All I know is that they're going to compete with each other. And the biggest financial institutions in the world are going to be creating their own digital purchases. Yeah, it's going to be fascinating to see how it plays out because in some ways it reminds me of the early days of the internet where you had intranets were all the rage for a little while and you had companies trying to own their own platforms and build their own search engines and eventually an open standard one out. So it'll be interesting to see how that plays out in the financial services landscape. I want to go back to just the dollar in your note last week

got some really good attention in the crypto community actually. I don't know if you're aware of this, but your note around the threats to the dollar's dominance internationally. And I'd love to maybe just set this up for the listener. And could you maybe just talk about why this matters so much for the United States and why this is such an advantage for the U.S. to have the dollar be the global reserve currency? Dick Cheney once said the deficits don't matter. Now, he forgot to add the next few words, which is deficits don't matter to countries that have the world's reserve currency.

They do matter to everybody else. So the net effect is the first thing that you become aware of is that if you have the world's reserve currency, you can print as much as you want, and the rest of the world has to take it. And they have to take it because the dollar becomes the reserve in their central bank, not gold, but dollars and treasuries become the reserve in their central bank so that they can create their own currencies. So if you're increasing the number of dollars out there, you're increasing the reason reserves of central banks around the world, increasing their ability to create their own currencies.

But we got the dollar and we're calling the game. So the net effect is we never have to pay back our debt as long as we have the world's reserve currency. And if we never have to pay back our debt, we can create $2.9 trillion in money in a period of three or four months. We can ignore the deficits being created by the United States government. We can simply make the assumption that whenever we need additional money, all we need to do is print it. Nobody else in the world can do that. No other country in the world can do it. We can do it and we are doing it and we are taking advantage of it to the greatest extent

that anyone would ever have imagined. If we lose that ability, if this is no longer the only currency in the world available as the reserve, then we got to pay back our debt. And if we have to pay back our debt, we have to increase our taxes dramatically. We have to increase exports. We've got to stop importing things. Inflation is going to run wild, and we're going to run into a depression. The other thing that we have is if everybody in the world needs the dollar and we control the dollar,

then we can use it as a political weapon. We can sanction Russia, Iran, North Korea, anyone else, Venezuela, anyone that we want to sanction, we can do it because we can take dollars away from them, and that's going to crippled their economy. So we lose enormous political power if we lose the ability to hold that. Then the next thing is, every commodity in the world is denominated in dollars. You don't say, what is a barrel of oil, or what is the price of gold in euros or Rindby or one, or what have you? You say it in dollars, which means that if you want to buy those currencies, you have to have dollars. And to get those dollars, you have to buy them in the open market.

So we control so many things because of having this reserve currency, and we don't understand it. We can have the president going out saying the dollar is too strong, so we got to reduce the value of the dollar because it's going to increase our exports. He has no clue as to what he would do to destroy. the U.S. economy, if in fact that that was the case. It's fascinating to hear you say that, and there's so much I want to dig into there. I guess we're all sort of modern monetary theorists now, whether we wanted to be or not.

But to me, there's kind of a logical progression here, but this is not something that can last forever. You can't keep printing this. You wouldn't think so. But in 1972, I was hired by my first job as an institutional analyst. I'd been a salesperson before that. I go to my boss, a guy named Walter McConnell. I say, Walter, we can't do this.

We're printing so much money. We're running so much debt. This is going to create a collapse. He said, Dick, you're right, but it might not happen for a year, might not happen for five years, it might not happen for 50 years. It has not happened for 50 years. So we can do it until another currency comes along to knock us off the block. and that currency is coming along.

It is the one. And in my view, it is going to knock us off the block. So that was my next question, actually, is do you see the Chinese currency as the one that will knock us off the block? I guess you're saying yes. Absolutely. And it's because they talk about the fact that the Chinese have a long view and they got a dictator so they can run the long view. And the long view goes something like this. They joined the World Trade's organization back, I guess, in 2002, three, or four, I forget the year.

They then start trading with the rest of the world. They have a tremendous positive advantage in the products that they're creating. So all of a sudden, they become a dollar magnet, and all the dollars are floating into China. So now, fast forward to five, six years ago, they start lending that money to 78 countries around the world. And we can't find the exact number, but the belief is that they've loaned out $6 trillion, and that that represents, I don't know, 3 or 4 percent of the world GDP. In all countries that receive that money, virtually none of them can pay it back. So now what is China do?

China says, well, Mr. Ecuador, we would love to have all the fishing rights off your country. And you can give them to us, and we won't require you to pay back the debt. We'll lease them for 100 years. So Ecuador jumps at it. Or they can go to Djibouti, which is a country in Africa that nobody heard about. And they say, well, we know you can't pay us back. So maybe you give us your port. And we'll lease it for 100 years.

And by the way, all of the material that the United States Army base in Djibouti gets goes through that port. So now you've got the Chinese military base next to the U.S. military base. Chinese have access to the port. At any time China wants, they can shut it off to the U.S. Or they go around India and they say to Sri Lanka, the Maldives, a whole bunch of other smaller nations and big ones like Pakistan and Bhutan. And they say, okay, guys, you can't pay us back. We want this land.

We want this facility. And you don't have to pay us back to debt. So now what's the next step? If you go to Iran and they're doing business with China, What are they doing business in? It's not in dollars. The United States is sanctioned them. It's in Juan or in Mindvi.

What is North Korea doing it in? What is South Africa doing it in? What is Russia doing it in? So what they've done over a long period of time, over a well-crafted program, is they've set up financial interlinks in which they can demand the use of their currency and they can demand the elimination of the dollar

in transactions. And then in a lot, they can say, if you're going to pay us back, don't you do it in dollars because we don't want them. If you think you're going to trade with us, we'll sell you our goods at the lowest price

because we have the lowest labor cost, but we're not going to do it in dollars. You're going to do it in Rimbab. Ultimately, if they keep getting more profitable as a nation, if they keep wrapping up more and more countries all over Africa, all over South America,

They even got into Italy in a big way, they will push the dollar aside and we'll be in trouble. You can see how that would be a really scary world. I guess maybe it's going to happen. You think it's inevitable? Yeah. Over what time for him? Well, think about it. What are we doing?

Are we doing anything to protect the dollar? No, we're arguing that the dollar's value should be lower so we can decrease trade. We're not doing anything to control our deficits. we are simply making the assumption that the dollar will always be there and who are we giving the most dollars to. Everybody still buys their stuff at Walmart. So we continue to siphon the dollars. We continue to siphon wealth into China and we continue to ignore our allies. We continue to ignore the fact that we're printing this stuff right crazy and the Chinese are not doing that. And I guess two pushbacks to this might be, and I don't necessarily put these forward as things that I necessarily believe, but historically, I guess you would say that the U.S. has really defended that position because we've been willing and able to exert military influence in far off regions and essentially be a protector of countries that don't have navies and things like that. So that's one. I guess another pushback might be that China may not have just the institutions that are conducive to

capital formation in the way that the United States does in terms of rule of law and stability of their government? What would you say to those kind of pushbacks? Well, first of let's assume the United States goes to Ecuador and says we want to build a military base and China goes to Ecuador and says you can't let them do it. And if you don't, if you do it, you got to pay us back all the money you owe us. Or let's assume they go to Pakistan and they say, I really don't think you should allow this. American military base to stay here. And if you think they should stay here, pay us back.

And if you don't pay us back, we'll wrap you up in the World Court. You won't be able to export anything anywhere in the world because we'll grab it because you owe us that money. And the courts are going to tell you that we can grab whatever you have, anything, anywhere in the world. So to the degree that you have 78 countries that are indebted to China, China can have a huge influence on where America's military presence is going to be. Plus, what is the United States doing?

They want to shut down the military bases. They want to pull the people out. The other one is more compelling, which is that the argument is that the global financial system has become so complex and so interconnected that if you pull a dollar out of it, you'll collapse it. So the Chinese are not trying to do that. The Chinese are allowing that system to operate. But think about what they've done to build their internal generation of funding.

In the beginning, all the biggest China banks, which, by the way, are the biggest banks in the world. In other words, the fifth largest bank in China is bigger than J.P. Morgan Chase, which is the biggest bank in the United States. So what did they do? They go to the Americans and they say, how about buying stock in our banks? And we'll give it to you at 10 cents on the dollar or whatever currency. So all the everybody goes in, Citibank buys, Bank of America buys, Goldman Sachs buys, Morgan Stanley buys. We now own pieces of these banks. Then they say, okay, we're partners.

How do we develop these businesses in China? And the Americans say, oh, that's easy. We'll show you how to do it. We'll provide funding. We'll provide the outlet for what you're doing. We'll give you all the knowledge that you need. Then what happens a couple of years ago, the Chinese say, well, you made this. huge profit on the stock that you've made in our banks, why don't you sell it back to us at

market prices? And the American banks say, wow, we're going to make tens of billions of dollars here, and they sell it all back. So now, what are we left with? The biggest banks in the world, American know-how, American technology, and the biggest financial offerings in the world, which are solely done inside China without the Americans. They are so smart. They have done this thing so well that is incredibly frightening. You're painting a tough picture if you're sitting in the perspective of the U.S. Do you think that the stability of the Chinese Communist Party plays into this at all?

I mean, do you see a world where China goes towards a democracy at some point? Clearly, I don't have a clue, but the world is going in the opposite direction right now. I mean, democracies are being wiped out all through Africa and all through South America. Democracies are being wiped out in Europe, Hungary, Turkey. Are I saying that, Hungary? Hungary and Turkey, yeah. Turkey. It's too difficult to me.

Anyway, the point is that democracy is on the way. Now, Condoleezza Rice wrote this book a couple of years ago called, I think it's called Democracy or Civilization, in which he makes a compelling case as to why, as countries get wealthier and wealthier, democracy comes into play and it pushes aside the autocrats, but it hasn't happened, number one, and number two, we're not looking at a world, which is all of a sudden building wealth. We're looking at a world in which competition for resources is going to increase dramatically because of this virus, or maybe because countries got to repay their debt. So I don't know which forces are going to be predominant, but I'll be little to predict it.

And when you think about just what is the equilibrium here? It sounds like you obviously think this is going to happen. Do we have a world where there are two reserve assets? Do you think that this stabilizes in a place where you have the dollar and the yuan that are dominant or can it only be won? No, no. I think you're going to have multiple blocks. I mean, that's the way it was. In other words, the Portuguese basically had the first world reserve currency because they were sending those ships around Africa and doing all this trade. And then the British conquered all these countries. So they became the reserve. Then we came along and created our reserve. But the point is, most of history would argue that you have multiple currency blocks. And I think that's

what we go back to. I don't treat one. Is there a way to position as a kind of a macro investor in the space? Are there things that folks should be thinking of? Well, yeah, that's obviously what I'm trying to figure out is how do you make money out of it. Yeah. Yeah. What's your latest thinking on that? But besides buy Bitcoin, you were right about that at $50. I do own some cryptocurrency, but the point is, I wish I followed my recommendation in 2013. So I think owning cryptocurrencies make sense. I think owning some gold and silver makes sense.

I think owning the companies that produce products that are likely to benefit from the shift in dominance makes sense. I think there's a lot of ways you can make money out of it. And obviously, that's in my business what we're all about and probably in your business also. So the net effect is there are ways, if you will, to deal with this. So, Dick, you've been very generous with your time. I want to transition to a couple of closing questions. What advice would you give to someone that is looking to get into the research industry today?

Unfortunately, this industry is a dinosaur. And it's been made a dinosaur by this fourth industrial revolution. In other words, if you buy an ETF, you can do it in seconds. You can sell it in seconds. It costs your pennies a share. You don't have to pay anything on the way out. You don't have to sign any documents when you leave. So it becomes a compelling way to invest money.

So $4.5 trillion leave the managed money area into ETFs. It's $2.5 trillion, right? What that means is that you're now going to fire a whole bunch of people, on the managed money side, you're going to have to lower your prices to compete, you're going to have to tell your suppliers, i.e. guys like me, you can't pay you because I don't have the cash flows to do so. Basically, if you're at my side, you're going to have to figure out a way to trade at lower prices. You're going to have to figure out a way to handle investment banking without analysts messing around. So I think research is dying. Then you get the government in Europe

with this MIFID tour it's called saying, what the hell you don't need an analyst? They're a waste of your money and a waste of time. They are the governments of Europe are nihilists in terms of research. Obviously, some are prejudiced.

But the point is, it's just not a growth industry. Being an analyst is just not a place where you're going to make a lot of money and really do well. The only reason for being an analyst and this is the way it was in 1960s, when I became one, is you learn the skills of how to analyze things, and then you go become a money manager, or you go into a company, or you go into corporate finance,

but it's not the end route. It's the mid-stage to the end route. It's the internship before you're a doctor. I guess it's interesting with the waning of the soft dollars over time. Maybe we're seeing more people that otherwise would follow your footsteps and become researchers, just start their own newsletters and things like that. I mean, I read Ben Thompson every day, I think. In a previous world, maybe he becomes a cell-side research analyst covering internet stocks, but now he has his own website. You have to find some method of paying analysts if you want them, and the methods for paying analysts are going away. So there are dozens and dozens of newsletters, maybe hundreds, and maybe thousands that have been set up, podcasts, and other things to get at people and get them

to pay it. But the traditional method for the last 50 years is you have a money manager, you have the prudent man rule which says, et cetera, et cetera, getting out of Boston, and you've got all of this superstructure in place which funnels funds into research. Superstructure is gone. Exactly. And it's gone. You've got to figure out a new way to get money into financing, research, and analysis, and to my knowledge, it hasn't developed yet.

Well, hopefully it does. It's obviously a really important thing to highlight, and there's endless reasons why it should exist. What books, Dick, do you find yourself recommending most? You're someone that obviously reads a lot. Clayton Christensen has always been one of my favorite authors. I like that whole mode of thinking. There are so many books, though. I love the book, Guns, Germs, and Steel.

I thought that was one of the best books. Jared Diamond, that's a great book. Phenomenal piece of work. I mean, the thought it went into that. As far as this industry is concerned, there's so many books. I still believe that the Graham and Dot approach to investing makes sense. You have to analyze thoroughly and you have to understand what it is that you're talking about and you have to have a broader view of the world.

And these books teach you. to do that. So there's so much good stuff. It's unbelievable. And Dick, where can people follow your work, follow your company, and get access to your research? Basically, in the traditional fashion, they just open up an account and do business with us and we'll send them the research. Yeah. And so where can people find out more about your work, Dick? They've got to go to Odeon Capital Group and they've got to get in touch with the salesperson and the salesperson will put them in touch with what I did. Well, I'd recommend people definitely check out the Odeon Capital site and read more about your research. Certainly a lot of people in the cryptocurrency space became aware of that

research for the first time last week. And I want to thank you for being so generous with your time. This was a ton of fun to get to speak with someone that have been reading a long time. I thought it enjoyed it. It was excellent. Thank you. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.V.C. To listen to all of our podcast episodes, please go to On the Brink-Podcast.com or just click on the tab in our website. Thanks for listening.