The Pomp Podcast - #446: Lyn Alden on Investing Across Asset Classes

Episode Date: December 7, 2020

Lyn Alden is the founder of Lyn Alden Investment Strategy, which provides market research to hundreds of thousands of individual investors and financial professionals. Lyn’s focus is on value investing with a global macro overlay, including currency differentials, shifts in monetary policy, and equity valuations. In this conversation, we discuss long term debt cycle, government finance, sovereign debt problems, trade deficits, petro dollar system, 60/40 portfolios, emerging markets, bitcoin, and value stocks vs value traps. ======================= Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp ======================= Pomp writes a daily letter to over 90,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Lynn Alden is the founder of Lynn Alden Investment Strategy, which provides market research to hundreds of thousands of individual investors and financial professionals. Lynn's focus is on value investing with a global macro overlay, including currency differentials, shifts in monetary policy, and equity valuations. In this conversation, we discuss long-term debt cycles, government finance, sovereign debt problems, trade deficits, the petrodollar system, 60-40 portfolios, emerging markets, Bitcoin, and value stocks versus value traps. I really

enjoyed this conversation with Lynn, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up is BlockFi. You guys know I'm a big Big fan, and you will be too if you become a customer. BlockFi has three products today. You can buy and sell crypto on their crypto exchange. You can deposit crypto and take out a US dollar loan against your crypto collateral. Or you can deposit crypto and earn up to 8.6% APY on an interest-bearing account. BlockFi provides financial products for crypto investors and their world-class adit.

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write a daily letter to over 90,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at Pompletter.com. Again, Pompletter.com. All right, let's get in this episode with Lynn. I hope you guys enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital, or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy,

but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. Super excited to have Lynn here. I think this is going to be a great episode. Thank you so much for doing this. Hey, thanks for having me. Absolutely. Let's just jump right into your background so people understand the perspective you're coming from kind of where did you start your career and what have you done up until this point uh so my background's a blend of engineering and finance uh so i started as an engineer uh moved more towards engineering management uh and then increasingly into uh investment research instead so i apply that kind of quantitative background uh to investments uh and so within

that uh you know uh realm i i run a investment research firm uh so uh both retail investors and professional money managers read a lot of our research pieces. And we talk about all different types of asset classes. So equities, commodities, increasingly digital assets over the past couple of years. And so we cover a pretty broad spectrum of assets. And I go both to the individual company layer, but then also I have like a global macro overlay to the process to find companies that are kind of benefiting from long-term tailwinds rather than pushing up against things. Absolutely. And you've got this great website that's full of content. And one of the parts to me that is so fascinating is you've basically broken out a lot of the historical content into different buckets. So you've got kind of beginners, intermediate and experienced. I thought maybe a great place to start would be to start talking about some of those experienced pieces from a high level. And one of the first pieces is about the long term debt cycle. So maybe like, what is the long term debt cycle? And why is that important for people to understand and kind of keep in mind in today's environment? Yeah. So the long-term debt cycle was popularized by Ray Dalio. And of course,

there's a couple of different variations of it, but I think his is the one that is the most quantitative and the one that inspired my work the most. And so I dug a lot into that over the past several years. And so basically, we're all familiar with those short-term business cycles. So the boom bust five to 10-year business cycle. So we have rising credit, rising debt, building up the economy. Then there's either something deflates internally or you get an external shock, something starts unraveling that and you get a deleveraging. And so then you get a recession. But then the central bank cuts interest rates, policymakers come in with fiscal support, and you kind of short circuit that deleveraging. So you don't deleverage all the

way back to the same percentage of GDP that you were before. And so then you start building up leverage from there again. And so what happens is you kind of have a higher low and a higher high of debt levels over time. And so if you string multiple of those short-term business cycles together, instead of always returning to the same level, you get higher and higher debt and you get lower and lower interest rates. And those lower and lower interest rates allow and incentivize companies to pile on more debt because they can, with the same debt to income ratio, they can support its lower interest rates, interest overall fees, because they're paying a smaller percentage to their debt. So they can have higher and higher debt levels. But then what happens is eventually

that process hits zero, right? So interest rates come all the way down to zero, or in some cases, is mildly negative, which is kind of a new phenomenon. And there's not really a lot of policy room at that point. And that's when you get the long-term debt cycle. So that's where debt is so highly built up in the system, interest rates can't realistically go much lower. And so historically, that turns to asset purchases, that turns to monetizing fiscal deficits that end up being very big. And basically, what separates the end of a long-term debt cycle from a normal business cycle is that you usually get some component of a currency devaluation. So usually you get some sort of inflation with low yields and you kind of

inflate some of that long-term debt away rather than ever kind of pay it back nominally in real terms. Absolutely. And basically we're watching this play out in real time and almost a condensed timeline, right? In terms of the response to the coronavirus and the government shutdowns. Another one that you wrote about was kind of government financing. And so this is quantitative easing, modern monetary theory, et cetera. Maybe talk a little bit just about why government financing is so important as part of that long-term debt cycle and also as to what we're seeing today. Yeah, so basically it focuses on the fact that when we normally think of government, so they tax money from us and then they spend it elsewhere in the economy. And so they kind of are just redistributing what's there rather than creating what's there.

Now, they can also borrow from one part of the economy and then inject that into elsewhere in the economy. And again, that's just rearranging kind of resources within the economy. But then there's a couple of things that they can do that start to get a little bit atypical. So, for example, if they borrow from a foreign source, then they're basically extracting a pool of capital that's not in the domestic economy and then inserting it into the domestic economy. And so that can actually accelerate growth. But, of course, the cost is that you're now liable to foreign creditors. And so it's good while it lasts, but then you get the bill later. And so we actually see that a lot from emerging markets just because they don't have a lot of domestic capital.

And so ones that manage really well, that allows them to grow very quickly, and then they're able to, over time, become their own kind of more developed country. And so that external financing ends up being helpful. Other ones perpetually mess that up, and they default every decade or so. And the United States is interesting because compared to most other developed countries, because we're the global reserve currency, we actually have more foreign financing than most other developed countries. But the main difference between us and emerging markets is that it's in our own currency, whereas emerging markets are often borrowing in dollars, which they can't print.

And then the last form of government financing that I covered is basically that they can inject money into the economy, but then instead of extracting it from somewhere, the Federal Reserve prints it and just buys those treasuries. So you're basically injecting new dollars into the economy, but you're not extracting them from the economy. And you start to see that sort of thing at the end of a long-term debt cycle. And that's generally what contributes to a currency devaluation happening. Absolutely. And so great segue into the third piece is how money printing works. So how exactly does that work? So that basically covers a lot of different things. So the 2008 financial crisis is kind of a confusing thing for people to navigate, especially in real time,

because you see these central bank balance sheets going vertical. And so a lot of people thought hyperinflation is right on the corner. They're just printing money now. And based on most ways of measuring it, we did not get very high inflation over time. Now, of course, we have inflation in things like asset prices. We have inflation in things like health care, child care. But we didn't have that really broad inflation that is normally associated with, say, commodity prices going up a ton, and just everyday goods going up rapidly in price. And there's a very clear reason for that. That's because a lot of that money didn't get out into the broader economy. And so whenever we saw inflation in the past, we saw the broad money

supply go up. So broad money supply is currency and circulation, and all the money that me and you have in checking accounts, savings accounts, that's the money that we actually have overall. And that's a very large number. I mean, that's currently about $19 trillion in the U.S., whereas bank reserves are like wholesale money. So that's the money that banks have as base money that they have on deposit with the Fed, and it also includes currency and circulation, which is a pretty small component. And so what we saw back then was we saw a rapid increase in base money, but there was no real mechanism to get that out into the broad money supply. And the two main mechanisms where it gets out into the broad money supply are either banks have to lend it more or the aforementioned method where the government runs very large deficits and monetizes that by the central bank basically printing money to buy those treasuries. And so if you look back in 2008, we saw a really big increase in base money, but you didn't really see the same corresponding increase in broad money. And what makes 2020 different is because it's very large fiscal deficits combined with that base money increase, that's actually all getting out into the broad money supply.

And that's part of the reason why this pull-up in asset prices was so much more rapid and just overwhelming compared to the kind of recovery response we saw in 2008, 2009, because it's a fundamentally different mechanism happening. Absolutely. And so as we're watching kind of the activities of many different players right now to address the problem, it begs the question, which is your fourth piece of like, how do you actually fix a sovereign debt problem? Well, historically, they basically inflate chunks of it away. And so there's a study that shows that over the past 200 years, 51 out of 52 countries that got over 130% sovereign debt to GDP in some way or another did not pay that back

in purchasing power terms. Either they default, which is common in countries where it's denominated in a currency that they can't print, like Argentina with dollar-based debts, or they restructure it, which is a more polite default, or they pay it back, but it's inflated. They have a higher rate of inflation than their interest rates for several years. Some cases, hyperinflation, but more commonly just some degree of inflation. And a really good example is, so United States history, we've only had one period in history where we had federal debt to GDP as high as it is now. And that was in the 1940s to fight World War II. And the way that they paid for it, of course, you had a tax increase to some people. But in addition, I mean, they issued a ton of

treasuries to pay for that. And just because it was an overwhelming amount of treasuries, the Federal Reserve ended up buying a big chunk of them. And so did the commercial banking system. And what the Fed did was they capped yields at 2.5% or less. So T-bills would pay you 0.38%, and the long end of the curve would pay you 2.5%. But they had three double-digit spikes of inflation in the 1940s. So I think two of them were double digits, and one of them was like high single digits. And so it was actually, along with the 70s, one of the two inflationary decades of the past century. But yields were locked at 2.5% or less. And so anyone holding treasuries over the course of that decade, lost about a third of their purchasing power, even though they got paid their

interest, they got their principal back, but they failed to keep up with purchasing power. So by the end of that decade, you could buy fewer goods, you could buy less house, less commodities with those treasuries. And that's historically what happens at the end of a long-term debt cycle, is that you would flate a lot of debt away so that nominal GDP ends up kind of catching up to that debt rather than that debt ever being paid back in real terms. And so with trade deficits come into play as all of this is going on, there's kind of what's happening in the US economy, but obviously between countries, there's all sorts of issues. Why do trade deficits matter between countries and for currencies? So it's kind of a unique situation for the United States

because ever since we've shifted from the Bretton Woods system to the petrodollar system in 1970, So for readers who are not familiar, we went off the gold standard, and we went towards a system of floating exchange rates where there's still demand for the dollar because most global energy is priced in dollars. And so oil-producing countries mostly only accept dollars, and therefore every other country in the world needs dollars if they want to be able to buy oil from those countries. And so they all have to, a lot of them sell their own goods and services in dollars, even if they're not selling to the United States, or they have to exchange some of their currency for dollars. So it's kind of this global demand for dollars. And so the way most countries work is when they run a trade deficit, you know, that basically means that their importing power is much stronger than their exporting competitiveness, right? So they're consuming more than they're producing. And normally that ends up being corrected by some degree of currency devaluation, because

basically what it means is that their export's not competitive enough, their importing power is too strong, and the currency, because it's all floating exchange rates, eventually they have a recession, they have a potential financial crisis, and you get that currency devaluation, and that feels bad at the time, and their purchasing power goes down. But then if they manage it well, that increases their export competitiveness. And so that kind of helps rearrange their trade deficit. Likewise, there are some countries that run trade surpluses. And so what actually they do over time is a lot of them use mercantilist process.

So they actually purposely weaken their currency kind of a moderate degree to try to keep their exports as competitive as possible. And that's kind of the incentive structure we've built in to this 50-year kind of global monetary system. The United States is unique because in order to maintain global currency reserve status as currently structured, we basically have to run perpetual trade deficits. So unlike just about every other country in the world, we've run like 50 years of almost nonstop trade deficits. And that's because even when we have a currency devaluation, it's never significant enough to get us all the way back to the baseline. And so we basically exported our supply chains, our industrial base, our manufacturing base to international countries to a much greater extent than other developed countries have. So it's not just a case of developed countries outsourcing to emerging markets. It's a specific case of the U.S. doing that more aggressively than other countries, in part because of how the global monetary system is structured.

Is it sustainable? No, not in the long run. I mean, this showed that we could do it for like 50 years. Uh, so we, you know, you can, if you're the global reserve currency, you can do a trade deficit for a very long period of time. Also, uh, India has done it for a very long period of time, uh, because they have tremendous growth. They have good, you know, uh, you know, uh, software and things like that, but they, for

example, have to import a lot of their energy. And so you generally see a lot of currency weakness out of India over the long run because they, they tend to run long trade deficits. Uh, but the United States has been the most egregious example of this pretty much over the very long term. And basically you can do it for an extraordinarily long period of time if you're the global reserve currency, but eventually you get to a point where – and we're starting to hit this head now where you get rising populism because you've shipped out so many jobs, especially blue-collar jobs. And so you get that kind of rising class divide. You get populist politics versus establishment politics, and that can come out from both the right side and the left side of the political spectrum.

There's different types of populism because people all sense that something's wrong and there's different kind of understandings of what the root cause of that is or how to solve it. But you start to get that kind of – that more political divide. And we also saw, for example, during the heart of this crisis that we could – at the beginning, we could barely make masks or ventilators because we've outsourced such a big part of our industrial base to other countries. So it's starting to hit the point where even after 50 years, it's becoming quite – it's really starting to hit ahead. What's the end state there, right? So if you can't do it forever, kind of how does this come to a conclusion? So I just had an article on this, but basically we're probably looking at kind of another monetary system over the next 10 years or so. And I think that timeline could fluctuate, but we're already kind of seeing the foundations of it being built.

And so, for example, some countries that also want out of the arrangement. So depending on who you are in the world, some countries benefit, some companies hurt from it. So for example, these countries that manipulate their currencies lower and they run big trade surpluses, they've kind of benefited from the system. The United States has kind of both been harmed and hurt by it. So we extend our hegemonic power, right? Because the fact that our currency is used around the world for energy pricing gives us a lot of reach, but also it kind of sacrifices, like I mentioned, part of our domestic industrial base. And then there's other countries that say they want to price their oil outside the dollar system, but they get a lot of political

pressure for doing that, sometimes military issues. But we're starting to see more and more countries kind of slowly go around that system. And of course, they're led by countries that are historically not on friendly terms with the United States. So Russia has been kind of spearheading, you know, they wanted to sell their oil in euros to Europe and also sell their oil in euros to China, even. And so we're starting to see a little bit around the edges, particularly Europe, China, India, and Russia, starting to diversify their types of currencies they use for their trade. And so that allows them to be somewhat sanction resistant, and also helps diversify their currency exposure. And so I think over the long term, this kind of ends with a more multipolar currency world,

where instead of one global reserve currency, you have a handful of kind of regional reserve currencies. And it probably ends up with a pretty significant dollar devaluation, which again, would be extraordinarily painful for a lot of people, but it potentially helped bring back industrial manufacturing to some extent. And then from there, the challenging thing is you're still in this 50-year cycle of it's kind of musical chairs of all these countries trying to devalue their currencies compared to others. And so probably at some point, they're going to have to come to some sort of agreement or there's all sorts of different things that could happen that basically realign the monetary system to fix this really bad incentive structure they've built

up over the past five decades. And so I think we've seen just the IMF, a couple of others have talked almost about like a new Brenton Woods, right? Basically everyone come together and try to create some new global currency or global monetary system. Any ideas there as to like what that could possibly look like? Is this, hey, let's put all of our currencies into a basket and kind of will somehow globally regulate and kind of put some parameters around people so there's less competition and kind of more stability. Maybe it's let's go and adopt kind of a digital currency that is brand new that we all agree on. Like how do you think that plays out in terms of that new monetary system? I think that's one of the things that they would try. So there's a handful of

things that it can result in and it depends how well they organize themselves. And I would err on the side of that they're not going to organize themselves very well. And so that idea you mentioned is probably one of their preferences. And that goes all the way back to actually to the inception of the Bretton Woods system. So the Bretton Woods system was that as World War II came to a close, the United States had tons of gold. And so the idea was that we would peg the dollar to gold and hold a ton of gold, and other countries would peg their currencies to the dollar. So they'd have a gold standard by association, and that only lasted until 1971 just because it was kind of inherently unsustainable from the beginning, but it had that kind of period of stabilization. But there was actually – there were people in the beginning that said that wouldn't work and ended up being correct.

So one of them was Robert Triffin. Now there's a well-known Triffin dilemma that's based on his – he testified to Congress explaining why this would eventually fail. and also Keynes. He argued instead for a Bancor, the idea of a Bancor, which basically say, instead of making the dollar the center of this whole thing, let's have a unit that consists of a basket of major currencies, and we'll use that as our big international trade settlement thing, and we'll, you know, central banks and hold that in reserves. And his idea lost out. We went with the Bretton Woods system. That failed a few decades later. We went with the petrodollar system. Now, behind the scene, we still kind of had that other system plat a little bit. So the

International Monetary Fund issues things called special drawing rights, SDRs. And those are, it's a fancy term, it's basically a basket of major currencies. And so you kind of have like this bank core, but it's just not widely used. So you'll see it on a handful, you know, some central banks will have like a token amount of SDR sitting there, but it's just not the system that took off. And so some of these proposals are to use some of these newer digital technologies and to make something like a digital, like a Bancor. There's something like a Libra, except instead of issued by Facebook. So the Libra is basically a Bancor, except it was a basket of currencies wrapped in a more convenient digital wrapper, and that would have been issued

by Facebook. Whereas some of these central banks are calling for something like one that's issued by the IMF or one of these other kind of super government organizations. And that would kind of serve as a neutral reserve asset. The problem with that approach, of course, is that it takes so many of these major powers to cooperate and agree on an outcome. And so some of the other alternatives are you could see, for example, regional bankers, right? So, you know, Asia Pacific just signed a giant trade deal. For example, you could see, you know, a dozen or so of those countries agree to use some sort of, you know, kind of stable coin basket between themselves for some international trade. Or you could just see more and more decentralized energy pricing. So without even

any of these baskets, you could just see Russia sells their oil in euros or dollars instead of just dollars. You could see China buy oil in dollars, euros, or their own currency. You could basically see a handful of major currencies. And then also, there are some proposals to use gold in some of these standards to basically try to end this period of kind of around the table currency devaluations. And also, of course, now we have Bitcoin. And so I've used the analogy of like, you know, in Westeros, all the different like kings and queens are trying to like feud among themselves and figure out what systems they want. Meanwhile, the White Walkers are just, you know, expanding exponentially like a machine and just kind of coming for that system.

And so we'll see how that plays out. But we have these kind of all these different possible alternatives. But one of the main threads that normally comes with any one of these systems changing hands is that it usually accompanies with a currency devaluation. What do you think is the most likely path? So there's all these options, but do you have either an opinion or lean one way or the other in terms of what that replacement system would actually be? I think it's going to be layers over time. So part of it is I don't know, which is why I'm not committing to a specific outcome. However, we're already starting to see decentralized energy pricing. And so my base case, even just without basically assuming

like no action, no major agreements, no action. Basically, we would see more and more non-dollar energy pricing around the world, and therefore kind of a shift in how central banks manage their reserves. And so, for example, over the past several years, many countries have stopped purchasing treasuries, for example. So, we have not increased foreign exposure treasuries over the past five, six, seven years by a significant amount. And that's kind of historic than usual. And instead, a lot of them have actually been topping up their gold reserves, like Russia, for example, de-dollarized and then started to build up their gold reserves. And then also, I highlighted before that I think you're aware that Iran has been dabbling in Bitcoin, of course, because that allows them both to have – they can convert resources into a monetary asset, and they can go around sanctions. And so I think basically without action, you're just going to see more and more decentralization as all these different players kind of work around the system.

And then if anything kind of comes from that, like a regional, you know, trade agreement to use a, you know, kind of a stable coin thing, you know, that's kind of my base case is that more decentralized kind of messy, gradual approach. Yeah. So you've done a great job kind of laying out where we are from a macro standpoint, from long-term debt cycle to kind of the government financing and these trade deficits. I want to talk about individual asset classes as we kind of look forward 2021 and beyond. Maybe we can just start with the bond market in general. How are you viewing that? So pretty bearish. So it has done very well for a long period of time because you benefited from positive real rates and you had declining rates. So you had a lot of capital appreciation in those bonds.

but now in many countries, you're negative yields. And in the United States, you're slightly positive yields, but it's still negative real yields. So adjusting for inflation is negative. And that inflation is probably understated. So you're actually probably even more negative than that. And so bonds going forward, especially if past long-term debt cycles have anything to say here, are likely to provide negative real returns for quite a while. Because even if they were tried to rise, you'd probably eventually have central banks cap them. Basically, the market, instead of expressing itself with yields, would express itself with currency devaluation. You'd have a devaluation of currency relative to hard assets. I think, for example, if you own treasuries,

you're going to get all your money back. It's not going to be the same money, say, if you have a 10 year treasury. Those dollars 10 years from now are not going to be the same purchasing power of that they are today. And so I'm pretty bearish on bonds, especially in real terms over a multi-year period. What would be the argument for somebody to hold bonds, especially in like a 60-40 type portfolio now, given that bearishness? And I tend to agree with you on kind of your perspective, but like what would the bull case argument be to hold bonds right now? So there's kind of one main, which is trading. So a lot of traders, if they want to bet on, say, a deflationary crunch, Say we get another solvency event that looks kind of like what happened back in March, because a lot of economies are shutting down this winter because of the next wave of the virus.

And so say you have another kind of solvency problem, and we get kind of that risk-off move, you could see bond yields go back down, and then you get a lot of capital appreciation out of those bonds. And so there are some traders that enjoy the long end of the curve because even if rates stay low and stay below the inflation rate, they can still potentially make trading capital gains. So if people have a strong conviction on kind of that intermediate-term move, that's kind of a playground for them. Longer term, it reduces nominal volatility to have some, say, T-bills in your portfolio. Because say you're an older investor and you're 100% invested in the stock market, that can go up and down wildly. Whereas having, I like to use a non-zero T-bill position just to have some dry powder to kind of rebalance into any sort of dips and sells you might get in some of the other asset classes

that I like better. So I'm underweight bonds, but not zero bonds. As far as the 60-40 portfolio, I don't think there's a really great justification to have that anymore. I think that investors basically should find chunks of that 40% bonds. And even if they don't go to zero bonds, they just say, okay, I want to put, say, X percent of that into gold. I want to put X percent of that into Bitcoin. I want to diversify my equity exposure so it's not all S&P 500. It's either other markets or things like that. Basically, I think it needs to be more diverse than just 40% treasuries and 60% S&P 500. Absolutely. Gold

is obviously one of the most popular commodities and one that gets a ton of attention. I know that you've got some opinions on gold itself, but then also you've very clearly articulated this inverse relationship between interest rates and the gold price. Talk a little bit about that asset and that relationship. Yeah. So over the long term, gold's done a pretty good job of holding its purchasing power. And so if you look at the very, very long term, it generally keeps up with a broad money supply per capita. So as we print more and more dollars per person, whereas the amount of gold per person stays relatively fixed because both gold and the population increase at a very slow rate, it's generally about the same amount of gold per

person. And so over a multi-decade long term, gold generally keeps up with the increase of broad money supply. Or another way to say it is that dollars devalue relative to gold as they're created at that rate. But along that trend line, the biggest correlation for gold's movements up and down are real interest rates. And so that's, for example, the 10-year treasury minus inflation, as officially reported. And so what happens there is if you can get a positive real yield, like if inflation is 2%, but back in the day, you could get 5% with your treasury, right? So you're getting a 3% real rate of return. And so you're actually increasing your purchasing power by getting that interest rate. So the opportunity cost for holding a yieldless asset like gold

is pretty high. So gold becomes relatively unattractive. However, say you have the same inflation of 2%, but that treasury bond only pays 1% interest rate. Well, now you have a negative 1% real interest rate on your treasury bond. It's something that that yieldless, that zero yield gold looks a lot more attractive, especially because it's also kind of inherently inflation adjusted. And so you generally see a very strong inverse correlation between gold and real interest rates. And so I became quite bullish on gold back in 2018. Gold, silver, gold miners, silver miners. We had a really big run there. In August of this year, I got a little bit more defensive just because we were starting to see real rates starting to tick up a little bit.

So they reached as low as negative 1.08% roughly. And they started to increase a little bit, mainly because 10-year treasuries started to rise. So the yields started to rise. And so we started to get a correction in gold. We're still negative real yields, but they're just less negative than they were at their peak. And this tends to happen in kind of rate of change terms. So because they're less negative, gold is slightly less attractive than it was in August from that perspective. And so we've seen a kind of a correction in gold. And so I'm still bullish on it over multi-year long term, but you have to kind of watch how that plays out. So for example, if yields keep rising for a while, gold could still be pressured for some time.

The types of catalysts that would really make it take off were if you were to get rising rates and then the Fed decides to do yield curve control again, like they did in the 1940s and say, okay, we're not going to let the 10-year treasury go over 1.5% or whatever the number they pick, then that has to express itself somewhere else. So you could see, for example, a bid for gold, a bid for commodities, a bid for Bitcoin, which we're already seeing. And so I'm so long-term bullish on it, but it's very tied to real interest rates in the immediate term. Absolutely. Another commodity is oil. What are your thoughts there? So I was more cautious of it going into this recession, but as we got this big bombed out,

the whole energy sector, it's been one of the biggest gaps of performance ever in U.S. stock market history. So the performance gap between energy and tech this year was so big, you have to go back to the 1930s to find a time where one sector underperformed another sector by this much in one year. And so I became pretty bullish on high-quality energy stocks this year, just because the valuations were priced as though they're going to go out of business three years from now, whereas you know they're also they're cutting their capital expenditures right so even though we have a weaker demand now we're also going to get weaker supply and also you know some of them like there are pipeline companies that that transport that that oil and that gas and the

natural gas liquids that are made that use for all of our plastics and all of our kind of additives that we use in our daily lives and so a lot of those became relatively attractive because they're not very sensitive to energy pricing even though they were sold off as though they were because people sell the ETFs, they sell the whole sector. And so I started basically making targeted bets in the energy sector. And I'm, I'm pretty bullish with a, you know, kind of an intermediate term outlook on them. You know, I think this, the next few months could be a little rough, but I think, you know, over the next several years, you kind of see that reflation trade. Absolutely. And what about things like timber or what I'll call kind of the really alternative,

alternative assets? Any thoughts there? So I had a timber holding earlier this year and I've trimmed it because it did fairly well. So I'm fairly bullish on it just because residential housing is doing fairly well. It's not a market I cover as closely as I cover precious metals or Bitcoin or energy, but it is something I've used to diversify. So there are some assets like uranium, timber, soft commodities, like either agricultural products or the fertilizers that go into them. So I do like certain targeted commodity exposures like that outside of the normal kind of gold, copper energy complex. Got it. Let's talk a little bit about real estate. There's all kinds of chaos going on across markets, commercial, residential,

geographies, et cetera. But just how do you have, or what is your view from kind of a top-down standpoint as to what's unfolding in that market? So of course, we're having the well-known shift where a lot of people are moving out of cities and kind of emphasizing the suburbs and the rural areas a little bit more attractively. We're also seeing kind of that flee from higher tax states into some of the Southern states. So places like Texas or the Florida Panhandle, there are places like that that they haven't perhaps had the influx that they should have based on kind of the characteristics that they offer. So I think we're seeing that kind of rapid rotation. I don't cover the real estate market as closely as many people do. But in general, from a broad perspective,

I do think residential property in the U.S. outside of major cities is a pretty viable asset class, especially because you can get a really low 30-year fixed rate mortgage attached to it. And so you basically have a really conservative way to short fiat currency. I wouldn't over-leverage. I wouldn't buy something that is not going to produce cash flow or that you're not going to live in. But basically, I do think that that's a viable part of an asset mix, is to have basically a good property with a, you know, a reasonably leveraged, you know, mortgage on it. Let's talk about stocks and equities. I'm going to try to break this down into some, you know, kind of chunks to make a little bit more digestible. Let's start maybe

with domestic equities in the non-tech sectors. So some of them were actually, so if you look over the very long term, you know, growth stocks have really crushed value stocks over the past five, six years. And this year was really huge. Now, some of those value stocks are value traps, right? So they're not coming back. They are just in dead industries and they're just, you know, they're, they're slowly drowning and we all feel bad, but they're, you know, whereas other ones are, you know, they're, they've been beaten down by the fact that, you know, industry rates have gotten lower and lower. And so that's made growth stocks more and more attractive. We've also, I mean, people argue that some of these big tech stocks have been very,

you know, building like monopolies, right? So you have kind of the centralization of power. And so basically, a lot of these value stocks have just looked unattractive compared to some of the growth names out there. But in a more reflationary environment, potentially with slightly rising yields, some of those value stocks that are still in good industries, you know, there are some, for example, that say, you know, instead of working retail, they make their own products, and they used to go through retail, and now they're increasingly going to e-commerce. And so there are stocks like that, that are basically adapting to this new environment. And so they were disrupted for a few years, but then they're kind of coming back

because they're the ones that still actually make the products and that have decent brands. And so I'm still seeing pretty good opportunities in some of the non-tech sectors, but only with an emphasis on quality with the best management or things that are still going be around 10, 15 years from now. Domestic tech stocks? So I used to be fairly bullish on them, but just because the valuations got so stretched. And I still have some, but for example, in recent months, I sold my Nvidia, I sold Adobe, I sold some of my higher flyer tech stocks. And it's not that I think that their companies aren't going to do extraordinarily well. It's just that the valuations were so high that they didn't

really have much of a margin of safety anymore. And so, you know, my base case would be to see some, you know, it could be that they correct and go lower for a bit. Or another way of correcting is that they can just kind of chop along and go sideways for a few years as their growth continues to occur. And then, you know, a handful of years in the future, their stocks could be a lot more attractive again, because basically growth caught up to their valuations. So it's a space I continue to monitor. But at the current time, I think a lot of them are pricey. Got it. Let's talk about stocks that are non-domestic and non-emerging markets. So kind of other global superpower based stocks. Yeah. So I mean, that's primarily Europe and Japan and Canada can be lumped in

there as well. But basically, if you look at some of those indices, they have generally lower valuations, but also lower growth. And also it depends on what country you look at. So Europe is not very tech focused, which has been one of their issues for their equity markets for the past several years, but they also do pay higher dividends. So if we start to see some of this value rotation from higher yields and some reflation, I do think European markets could do okay. I'm actually fairly bullish on Japanese markets because they have a mix of tech, industrials. They basically have a pretty broad sector mix. It's pretty high value companies and they've radically underperformed for a very long stretch of time. But actually

in the past decade or so, they've actually been one of the strong performers. So we all know about the 30-year Japanese bear market because their market peaked in 1989 and it still hasn't come back. But it actually bottomed somewhere around 2012. And it's been on a pretty strong uptrend since then. And their valuations are still pretty reasonable. So I actually like some individual Japanese equities, even though I'm not a huge fan of the index. And kind of the same goes for Europe. So Europe has decent healthcare companies. They have some of the major commodity companies that I think could do well in this cycle that have not done well in the previous cycle. But I like Japan a little bit better from that perspective, just

because when you're kind of taking into account geopolitical risk, it's a little bit simpler. Whereas Europe, you have the whole issue of the euro and the fact that these individual countries don't control their own currencies. And you have disputes between the Northern European countries and the Southern European countries. So I have kind of concerns about kind of the more basic foundation of how that currency is going to work, whereas I don't really have that from Japan. So I've been preferencing Japan a little bit. And then everyone's favorite opportunity set right now seems to be emerging markets. How do you look at the emerging markets? Fairly bullish over the long term. So they generally do well in a weaker dollar cycle,

because as you mentioned before, emerging markets in general borrow dollars to finance their growth. And so what happens is if you have a strong dollar cycle, that basically acts like quantitative tightening for them. So their debts go up in real terms relative to their income and cash flows, their local currency. And so you get that kind of debt squeeze. And so we've seen that in a lot of countries. Some of them, of course, like Argentina, for example, or to a somewhat lesser extent, but to a significant extent, Turkey, they've really kind of weakened under that debt load. Whereas other ones like Thailand, Russia, India, they went into this with a lot more balanced situation. So they don't really have that major issue of a ton of dollar-dominated debt and

little FX reserves. So either they don't have a lot of dollar debt, or if they do, they have a lot of dollar-based FX reserves to be able to support that. And so I'm pretty bullish on them over, say, a five to 10-year view, just because valuations are more reasonable there compared to what you can get in the United States. And actually, you know, a lot of those emerging market indices actually have just as much tech as the U.S. markets. So you're basically getting a somewhat higher volatility play that potentially can go up for longer because you're basically getting a better value. But, you know, you'd only want to have a slicier portfolio in it just because you're taking on a lot of different kind of geopolitical risks. Absolutely. The last major

topic I want to talk about is Bitcoin. We've mentioned it kind of in a couple of different scenarios. There's obviously kind of this narrative of digital gold. There's this narrative of protection of purchasing power. It plays into some of the things around the long-term debt cycle and this new monetary system that could potentially emerge. How do you view the asset in terms of, one, its role in just the global macro economy, and then two, from an actual investment thesis? So it's basically shifted over time as Bitcoin has gone through more and more of these cycles and as I've learned more about it. So I covered it in 2017.

And back then, we had kind of competing narratives of store of value versus medium of payment. We also had the forks. So we had Bitcoin Cash. We had the rise of that alt season. And so I was concerned about dilution. I was like, even if money pours into the space, what if it gets diluted in a bunch of these other tokens?

But that's largely been settled over the past several years. The market's kind of strongly chosen Bitcoin as kind of its major store of value token. And some of these other protocols, they might solve individual problems, might disrupt other industries. But Bitcoin is really centralized. It's network effect around the role of being money. And so I turned quite bullish on it in April this year, both in the intermediate term in terms of where it is in the halving cycle. And so kind of looking out, say, two years from that point and saying, I think this is likely to do well in price terms.

And then longer term, it's done extremely well. I mean, its rise, I described it as algorithmic. If you look at its price pattern and log form, especially if you put the halving points on there, it looks like a machine just kind of slowly increasing, you know, quickly increasing its market cap. But on that log chart, it's like this steady kind of heartbeat going up over time, you know, every four years. And so I think it's going to be interesting to see how high that tops out, right? So, of course, you have one camp that thinks that that's going to go all the way, hyper-Bitcoinization, we're all going to be paying in sats. On the other hand, you have kind of the next step lower than that is I think that like Michael Saylor falls in this group where he views it as a bank and cyber state space, right? So instead of kind of taking over, it's this increasingly growing market share that anyone with an internet connection can access and store value in in a scarce asset.

And so I'm primarily viewing it at that level where as something with maybe $350 billion market cap as of this discussion, it has a lot of kind of addressable market, even just to be a digital gold, just as a digital store of value that can't be debased. I mean, that alone is a potential multi-trillion dollar market cap. And then going from there, we've seen, for example, Iran has played with it a little bit as store of value or going around sanctions, so as a medium of exchange. And I think if it gets big enough, you could see other of those smaller central banks start to dabble in it as well. And so I'm pretty bullish on it, both for retail investors and Wall Street money. And then we'll see how it goes.

it could be some state money going into it. Yeah. And one of the things I keep thinking about is, and you talked about the petrodollar, is there a world where we basically see some Middle Eastern country, let's say, go ahead, put a bunch of it in their reserves, and then start to attempt to price goods and services in Bitcoin, right? And that to me feels like that is a low probability of happening, but would have a maximum impact on both the price of Bitcoin adoption, etc. We kind of forced the hands of central banks around the world to go ahead and adopt this. Any thoughts in terms of geopolitically how this could play out in terms of if one of those central banks does go ahead and adopt it? Obviously, there's a difference between it being

an Iran, a Venezuela, North Korea type versus, let's say, a Saudi Arabia, Kuwait, or even the United States. But just how do you think about kind of that geopolitical sequencing and any of game theory behind it so i think it's it's there's some degree of probability for some of those more renegade nations uh but the thing there is that instead of saying we're going to adopt this uh and you're going to pay for it like that a lot of them are kind of at the whims of their customers so iran wants to do business with india they want to do business with europe and those countries generally want to do business with iran because they're both you know those areas are big oil importers iran has the oil and so they've generally had constructive trade uh you know

know, processes in the past. And so many of them want to do business with Iran, but they have troubles with U.S. sanctions. Same with China as well. They also want to buy Iranian oil and they also invest in Iran. And so, you know, Europe created Instex, like it's their kind of alternative to the SWIFT. So it's basically paying for things outside the dollar system, outside of, you know, that they can go around the sanctions. Now, they tested it with Iran earlier this year, but then they stopped using it. And I don't know if it's because they had, you know, behind the scenes, you know, pressure, or it just wasn't working. I'm not sure what the reasons for that was, but it was kind of an idea that just hasn't really kind of taken off. And then, of course,

we had the news about Bitcoin, Iran going into Bitcoin a little bit, using some of their miners to, you know, buy Bitcoin, they can buy Bitcoin directly from the ones they generate, and potentially use those for trade. I think Iran's basically willing to pay in whatever mechanisms that some of its oil importer neighbors or trade partners would be willing to use. So I don't think Iran's in a position to dictate terms. But I think anything that is basically outside the dollar system is something that they'd be willing to explore. Now, in terms of Saudi Arabia pricing oil in it, I don't think that's very likely in

the near term, just because there's still a couple of steps. So for example, they have an agreement to only price it in dollars. So I think before you'd see them price it in something like Bitcoin, they could price it in Yuan because, for example, China is their biggest customer now, and China has an interest in being able to pay it in their own currency. And so if Saudi Arabia prices it in China's currency, they can then use that to buy some of the tech that China is able to sell. And so we've seen that to a limited extent between, say, China and Russia. And so I do think that that would be kind of a more likely outcome that you'd see maybe more Euro-based pricing or more, you know, a little bit of China currency pricing in some of those energy markets before you would see, you know, a Bitcoin pricing. Absolutely. And so if we zoom out, right, we've kind of talked about both the macro environment and a bunch of different assets.

How do you think about your portfolio construction going into 2021? one. What are the buckets that you are making sure you have exposure to and maybe buckets that you're trimming considerably and maybe even if you have percentages in terms of target sizing for a portfolio going into the new year? Yeah. So I remain underweight bonds. So I use them as a little bit of a volatility dampener as a way to rotate into other asset classes if we get sell-offs, but I don't use them as a significant investment area. I'm in equities because my research service, we're able to buy individual stocks rather than just indices. I do a lot of work on individual companies. I have a basket of dividend growth stocks that are medium cap or

large cap, blue chip, but also they're not the old stodgy ones that aren't growing. They're also growing and paying dividends and they're highly relevant. Then the other hand, I have a basket of growth stocks. And so that's previously included stocks like Adobe and Nvidia. I've rotated that a little bit, including into MicroStrategy back in August when they announced they were going on the Bitcoin standard. I put a little bit of that in the growth section of the portfolio. I also have a commodity section, which for me most includes commodity producers or transporters, so energy pipelines, some of the energy producers, some of the copper producers, some of the uranium producers. I also have some allocations to gold and silver directly

and increasingly platinum. Also, I've been recently bullish on platinum. That's been one of my rotations a little bit, is a little bit of gold into platinum. And I'm also pretty bullish on emerging markets, but I separate those. So I use some of the broader indices. I also buy some individual stocks from emerging markets. And I also use either regional ETFs or single country ETFs so that I can kind of sculpt that into areas where I'm bullish on. Because if you look at a normal emerging markets ETF, it's heavily concentrated in China, which some investors may prefer, whereas other investors might not want like 40% of their emerging markets exposure to be in one country, especially China. And so you can buy, say, an India single country ETF or a closed

end fund that actively invests in India or things like that. So I do some targeted emerging market exposure. I'm underweight to some extent for developed markets, but not majorly underweight. I just think that emerging markets are a little bit more attractive. But I do, as I mentioned, like some individual European stocks, individual Japanese stocks. And then for U.S. stocks, I've generally focused more on that intersection between quality and value. So companies that are either growth at a reasonable price or that are bombed out this year, but then they're recovering and that their business model is still suitable for the next 10 years or so. And then of course, I also have a digital asset. I have Bitcoin in many of my portfolios as well. And so that's

one thing I'm probably bullish on the most specifically for 2021. But because the volatility of it, you have to manage the position sizing. Absolutely. This is fantastic. I could literally talk to you all day. I appreciate the time. Before I let you go, I asked everyone the same two questions and then they get to ask me one question to end it. The first question is, what is the most important book that you've ever read? Probably Lessons of History. It's like this a hundred page book that was written in like the 1960s and uh they basically summarized 5 000 years of history uh in 100 in like 100 pages and to basically these big big lessons just from rising and falling of of empires of of you know kind of geopolitical issues uh economic issues like we

talked about the long-term debt cycle they literally they have a section that like a chapter in there that talks about that happening in greece 2600 years ago and literally like you could take this paragraph and just put modern politicians names on it and it's the same it's literally the same thing like it's it's the same problems playing out they had the long-term debt cycle they had a currency devaluation it's literally like that kind of cycle just goes back all the way to the times of jubilees right so so a thousand years ago when you have a debt jubilee that's associated with the long-term debt cycle it's just it's basically how generations operate how human psychology works uh so whether what basically whatever system they're operating with

even though their system looks a lot different than our system today they still have the same foundational problems. And so it's provided a lot of long-term context. Yeah, that's a fantastic suggestion. No one's suggested that one before. The next question is more fun. Aliens, are you a believer or a non-believer? I think, I mean, probably in the universe, I'd be surprised if there weren't some out there just because the sheer, there's like the Drake equation or whatever it is where you calculate how many galaxies, how many stars per galaxy, how many of them have planets, how many of those planets are in the habitable zone, you know, what percentage of those planets, uh, made it, may have had the molecules bump together and create life. What

percentage of those, you know, become intelligent. Uh, so I don't know the number I'd be, I'd be surprised if, you know, we have like a hundred trillion trillion, you know, stars and we're, we're the only ones here. I tend to agree with you. You could ask me one question to, uh, to wrap this up. What's the, uh, one question that you got for me besides Bitcoin. Uh, what are you most bullish on? It's a great question. Obviously, the conviction in Bitcoin is like head and shoulders above anything else. And part of that's because that's where I spend most of my time thinking about and learning about. And so obviously, the portfolio is literally over 90% heavily concentrated in that. The second area that I think is really interesting, I've been

spending more and more time on is psychedelics. So the way that I think about the investment kind of thesis that i deploy is really uh twofold it's the intersection of like what are the things on the fringe that today um are very very out there but have uh massive um kind of addressable markets uh but many people are dismissing them or uh not quite yet ready to be like that early adopter and so psychedelics is like a perfect example uh if it becomes a thing it will be very big market caps will be um you know large you'll have many winners in that space and so if you kind of understand it early. It gives you the historical context as that industry continues to kind of evolve to really kind of navigate it correctly. On the other side, though, I also borrow an idea

from Naval Ravikant, which is basically being heavily indexed into private companies. And on the private side, the way that he's described it before is basically there are tens, hundreds, or thousands of companies spending how many you're invested in that are highly entrepreneurial, creative, intelligent, and they're basically, you give them money and now they're working to grow your capital. And so I spend no time in the public markets whatsoever. And really, if you kind of sum it all up as like what I'm looking for, it's really just like, where is the areas of the highest level of innovation? And so kind of those fringe type markets are really interesting. And then also just like small entrepreneurial teams that are going after big

problems as well. So sometimes that's not necessarily a fringe market, but just they're trying to build something new, create innovation, and really kind of create and capture value. And so when I think about kind of Bitcoin being the focus, if you said markets, I would say psychedelics. If you said kind of investment area, if you will, it would be in the early stage private markets rather than any of the commodities or public markets or anything like that. That makes sense. And I guess that overlaps too, because a lot of those psychedelics would be you know, in that, in that private, that, yeah, it makes sense. Absolutely. And if you, and if you really think about Bitcoin, right, I mean, it's,

it's decentralized, there's no company, whatever, but at the same time, it's, uh, kind of this heavily, uh, innovation driven, uh, kind of disruptive type technology as well. Right. So it's kind of, they're all interrelated to some degree, but I think those are the ways that I kind of think about the buckets is, uh, fringe markets and then, uh, just private early, um, where really what you're doing is, uh, you have a high probability or a higher probability of zeros, but what you're looking for is you're looking for the most asymmetric type payoffs possible, right?

So if you almost think of it as like an Austrian type of investing where you understand that the longest time horizons give you an advantage and if you're able to stomach volatility and kind of all of the downsides of that early stage investing,

then you've got a pretty advantageous situation. Makes sense. Yeah, that's a really good answer. Yeah, absolutely. All right, where can we send people to find you on the internet or find out more about all of the research you guys are doing?

Uh, so I'm at Lynn Alden.com. We have a free newsletter. We have public articles and I also have a low cost paid research service. Uh, and I'm on Twitter at Lynn Alden contact. So I never do this, but heavily recommend people to go check out all of the writing. Uh, I love it and you do a fantastic job with it. So if people, uh, want to hear more, they should absolutely go, uh, go check out the work. Uh, cause it's obviously you guys put a lot of time into it. And, uh, it also helps that, uh, you're, you're more right than wrong, which is always, uh, nice to see as well. Thank you.