The Prof G Pod with Scott Galloway - Prof G Markets: Liquidity and Portfolio Management in an Inflationary Decade — With Lyn Alden

Episode Date: April 10, 2023

This week on Prof G Markets, Scott speaks with Lyn Alden, an independent analyst and full time investor, about banking regulations, the promises of borderless bitcoin technology, and her three pillar investment strategy. They also discuss the productivity gains of AI, opportunities in mispriced assets, and how commercial real estate is unraveling like a slow motion train wreck. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to a special episode of Prop G Markets. The dog is on vacation. That's right. I'm at some kennel in the countryside, rolling around in deer urine. So today we're running a brand new conversation on the state of the markets with Lynn Alden, an independent analyst and full-time in the countryside, rolling around in deer urine. So today we're running a brand new conversation on the state of the markets with Lynn Alden, an independent analyst and full-time investor. I absolutely love Lynn. I find that she's incredibly analytical, sober, smart, thoughtful, measured, all those good things. The kind of person you want to manage your money. So with that, here's our conversation with Lynn Alden. Lynn, where does this podcast find you? I'm in New Jersey still.

In New Jersey still. That's what the New Jersey Chamber of Commerce likes to hear, the term still. Yeah, somehow still here, yeah. You wrote in your newsletter that regulators want banks to be reasonably safe, but not too safe. They want all banks to be leveraged bond funds to a certain degree and won't allow safer ones to exist. Say more. There have been a number of banks that have applied and said, we just want to hold all of our cash deposits at the Fed for our customers. And you basically have a full reserve bank. And those types of applications tend to get denied for various reasons. Some of them are litigated. I think there's not been enough awareness of technology changes among financial regulators in recent years and decades, because when we think of bank runs, we see pictures from, say, 1907, people going to the bank, we saw out West recently, these were very kind of tech forward banks and people could, you know, they had software APIs. They could like withdraw their funds, you know, through their own interfaces. Things move much faster. Starting this year, FedNow

is going to come out, which can further accelerate how fast money can move around between banks. And so some of the liquidity requirements that we're used to seeing in banks that might have made sense decades ago, I think don't really make sense here. And so, yeah, basically, I think the regulators are kind of in this weird position where they obviously they want safe banks. They want banks to have safe collateral, safe lending practices, to be well capitalized. And yet, on the other hand, you had these banks that want to be super liquid, super safe, and those don't get accepted. Couldn't you make the argument that a certain number of ring-fenced bank failures is probably

a signal of a healthy economy? If we never had a bank failure, wouldn't that say that we aren't being promiscuous or aggressive enough with the leverage to grow the economy? Well, I think that, yeah, it's normal to have bank failures. I think there's different types of credit, though. I mean, basically, there's very healthy types of credit, short-term financing, basically making it so that small businesses, large businesses have access to all sorts of liquidity that they need, that doesn't necessarily have to be combined with some of these riskier practices, as well as, you know, we don't necessarily need customer deposits to be the ones fueling the majority of those loans. I mean, that's obviously what maximizes how much of that lending happens, but it also puts a lot of those customer funds at risk.

And there's even a thing where, you know, obviously there's different types of deposits. There's demand deposits, there's time deposits. And I think there's at least a case we made to have more rules around demand deposits. Demand deposits are ones that can come out instantly. And banks, they kind of assume that no more than 5% or 10% of their deposits are going to pull out at any given time, because otherwise they run into a severe liquidity crisis. And that just seems like a very fragile situation, I think, in the 21st century. And I think that some of the guardrails make less sense now. They don't really guard against the problems that arise in this new system. There's so much regulation around avoiding credit problems, like making bad loans or buying bad securities, and there's not enough attention paid to the

liquidity. And I think that's kind of the underlying issue, that obviously credit is still important, but that most people, when they think of a bank, they just want to hold deposits there, they want to have payment services, and they don't want to feel like they're kind of investing. If I understand you correctly, it's that the one side of it is just the requirements for banks to, you know, around what they invest in. And usually what takes down these financial institutions is mismatched durations, investing kind of long and borrowing short. But what you're also saying, and I've been reading a lot about this, is that in an era of online banking where typically used to be, oh, I'm a little, I read a story in the newspaper two days later about this bank trying to raise money and perhaps not being as financially sound as it should be. Oh, I should really go to

the bank tomorrow and get money out. Now it's, you see it on Twitter and within three minutes on your app, you can withdraw the funds. So are you saying that given the dispersion, if you will, of the real-time nature, how easy or frictionless it is to take funds out, you can go from a standing start to a run on the bank in no time. And are you suggesting that we probably need to recognize that and have greater liquidity ratio requirements? Yeah, that's a perfect way to describe it. A lot of financial technology or banking technology over the past century and a half is basically about transactions have increased in speed a lot faster than settlements. But if you go back long enough, you have these gold-backed

banks. And of course, the gold's very slow, and you put it into the bank. And then once it's in the bank, you now have these accounts that are linked to each other by telecommunication systems ever since the second half of the 1800s. And you basically transform the speed with which your money can move. And so banks rely on that speed difference to assume that bank runs are not going to be very rapid, not very frequent, and not done unless there's very good reasons to do so. But in a world where the settlements have kind of caught up just as quickly as the transactions have, then you add social media, you add software APIs. Everything has accelerated so much. Having 5% liquidity available just doesn't really cut it in that type of new environment. And so, yeah,

I think as technology has evolved, liquidity needs are going to have to evolve as well. Let's talk about the Fed. You also wrote in your newsletter that the U.S. Federal Reserve is now operating at a financial loss and is months away from having negative tangible equity for the first time in modern history. Can you explain what you mean by tangible equity at the Fed? Should we be concerned with this? Well, we should be concerned, but not for the same reason. So basically, the funny thing is the Fed isn't the same problem as a lot of these banks are. The difference is that nobody can do a front on the Fed. And so basically what the Federal Reserve did is that they bought a lot of treasuries and mortgage-backed securities, which are long-duration assets, and those are their assets. Just like any other bank,

the Fed has assets and it has liabilities. And its assets are mainly those long-duration treasuries, mortgage-backed securities, things like that. Their liabilities consist of a few different buckets. One of them is banknotes. Anytime you have physical currency, that's a direct liability of the Fed. They pay zero interest, obviously, on physical banknotes. Then bank reserves hold their excess cash at the Fed, and they do, in the current environment, get interest on those bank reserves. That's one of the tools that the Federal Reserve uses to set its interest rate policies. So they kind of have to pay that out. And then there's also reverse repos, which are more complex. But basically, it's another side of the Federal

Reserve's liabilities, and those also do pay interest. And what happened was, for the first time in modern history, they raised rates so significantly that their short-term liabilities pay out higher interest than the interest they're earning on their long-duration assets, their treasuries and the mortgage-backed securities. So the Federal Reserve is operating at a loss. I mean, it has about a trillion dollars in unrealized losses on its treasuries and mortgage-backed securities, but unlike a normal bank, it's never forced to sell them. It's entirely its choice whether or not it ever realizes any losses. It's almost certainly not going to. But aside from those unrealized losses, their interest margin is negative.

So basically every week that they're in operation, they're actually losing money. And the way that works is that normally the Fed, for decades when they've been profitable, they send excess profits to the Treasury. Basically, it goes back to taxpayers. Now that the Fed is unprofitable, that's no longer happening. So one ramification is that the Treasury just lost about $100 billion a year revenue source, which is equal to about four NASAs, more or less. It seems like small compared to numbers that have been thrown around in recent years, but $100 billion is still significant. And then it also kind of long-term can somewhat damage Fed independence. Part of the reason why the Fed has assets, has liabilities, operates at a profit

is because it's almost like a fourth branch of government. It's basically something that's separate from the executive branch. President can't just call up the Fed and tell them to, say, change rates before an election, for example. In some countries, they can, but in countries with some degree of central bank independence, that's kind of their safeguard against that. Now, what I mean by negative tangible equity is that if you add up their assets and their liabilities, putting aside the unrealized losses, which puts them at deeply negative equity territory, even without those, they have negative equity now. And that's because of these accumulated operating losses.

And the way the accounting works is that they actually record those losses as kind of like an asset, which is how they stay solvent on paper. And the way that works is that if they ever become profitable again, they get to pay themselves back before they would ever continue paying the treasury in the future. So they kind of say, well, we're broke now, but one day we won't be broke. And so out of that future income, we'll pay back this whole. And so that's what I mean by negative tangible equity. And basically, it kind of shows, one, that most banks, their liabilities don't adjust right away. They don't raise deposit rates quickly, whereas the Federal Reserve did, essentially. That's how it sets monetary policy.

So it actually kind of showcased this problem in banks before it happened to normal banks. And it happened to the Fed more severely with the big caveat that no one could do a run on them. So they're able to kind of operate perpetually in that kind of zombie state. So the Fed has to manage this tension between trying to control inflation and their primary tool is raising interest rates while not tanking the economy. Where do you think the Fed is in terms of managing that balance? So before recent events with the banking crisis, they were firmly on the side of do everything they can to get inflation down, even if it slows down the economy, even if it increases unemployment. And it's become more challenging in recent times because I think their approach, especially if you look at the Fed chairman when he talks about this, he cites the 1970s. He cited Paul Volcker, for example. And if you look back in the 70s, the inflation we saw then was primarily lending-driven. Most of the new money in circulation was from bank lending. And we had very low debt to GDP. And so, you know, the policy was, okay, how do you tighten it so that banks lend less? If you go back further than that to the

1940s, we had very high inflation, very similar to the 1970s. It was not from bank lending. Banks were barely lending at all. It was obviously from, you know, very large monetized fiscal deficits to fight the war, as well as all the domestic parts of doing that. Manufacturing facilities, when soldiers come home, you give them GI bills, and that was inflationary. And debts were so high that the Federal Reserve just kind of partially lost independence. And in that environment, they didn't even try to raise rates. They actually capped yields, and they just held rates low despite inflation. And I think that the challenge that they face here in the 2020s

is that their environment is in many ways more similar to 1940s. There's very, very high debt to GDP. And there was a war-like fiscal response in recent years, two COVID, two lockdowns, things like that. Very large money creation from that fiscal source, not due to excess bank lending. And yet they're trying to treat it as though it's a 1970s style thing. So, you know, jack up rates as high as you can,

try to tighten bank lending, even though banks, you know, they're just kind of lending at a normal pace at the current time. And so I think that's the challenge the Fed finds themselves in. And historically, this is the single hardest environment for a central bank to operate because it's almost like you're just choosing between different wrong answers. And so I think until the bank crisis, they were firmly on the side of inflation. And now I think they're kind of forced to take a more balanced approach because it's not just about slowing down the economy. It's also about financial stability. And so to the extent that they continue to, say, raise rates or suck liquidity out of the system with quantitative tightening, that's kind of pulling

liquidity out of those smaller banks at a time. And as we just discussed, technology's changed. And if anything, banks have higher liquidity requirements, and the Fed has been actively withdrawing liquidity from the banking system. Stay with us. We'll be right back. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts.

Published by Capital Client Group, Inc. What software do you use at work? The answer to that question is probably more complicated than you want it to be. Capital Client Group, Inc. Anyway, what is productivity software? How will AI affect both? And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts. The stuff you worry about, if you worry about it long enough, I believe it doesn't come true. Remember all the hand-wringing over Greek sovereign debt like 10, 15 years ago? We were waiting for Greece to fall and then it would be a domino contagion through Europe. You know, it's the stuff you're not worried about that gets you. It feels like a recession has been a month away for 18 months now. And I look at unemployment, which is at historic lows.

I look at spending, which I guess there's some evidence it's slowing down, but it still seems robust. And yet people seem to be so worried about a recession. And I can't find any data supporting this impending recession. What are your thoughts? Where do you think the economy is headed and what evidence do you think supports that direction? So I think it's almost like two economies. So there's industry-sensitive sectors and then ones that aren't really. So for example, travel and restaurants are not very industry-sensitive. And obviously, there's been pent-up demand, no signs of recession there. Whereas if you look

at either highly leveraged spaces, like obviously real estate is very interest sensitive, that's been firmly slowing down. And then when you look at unprofitable tech companies, right, because they're reliant on basically having a zero discount rate, constantly issuing new equity, underpricing their products. And as soon as they have a real cost of capital, a lot of that starts kind of eating itself and going in reverse where they have to, you know, they can't issue the equity the way that they were. Therefore, if they're going to keep paying their employees, they're going to keep funding themselves. They have to raise prices of their product. And then that slows down their growth because some of their growth was just not really there to begin with. It was only there because they were underpricing

their products because they were selling more equity. And so those two areas are the hardest hit areas. And they're generally higher income people on average. So a lot of recessions, you see it kind of start from the bottom up, lower income, people lose their jobs first. Whereas in here, if anything, we've seen the opposite. So I think that I would say the majority of indicators are decelerating while still positive, which is, you know, when you look at most of these in rate of change terms, you see deceleration before you see negative numbers. And so if you look at, say, the Purchasing Managers Index, for example, that's been decelerating since 2021, which is normal speed. I mean, these are usually roughly like 18 months down and up cycles. Real estate sector has been decelerating. So there has been a lot of, I think, genuine concern around

recession, but it's offset by these other strong areas. And with unemployment in particular, right before recessions, unemployment is usually low. It's kind of a lagging indicator. That's one of the hardest things to go by. But I think to your point, there is a different employment response this time because it's a lot of those, I guess, quote unquote, real world jobs that are still firmly in demand that don't have a lot of those, I guess, quote unquote, real world jobs that are still firmly in demand that don't have a lot of people filling them. And so there's really not a lot of signs of stress there. But I think from the Fed's perspective right now, they're more focused on inflation versus financial stability. Even though their two mandates are basically about

employment and price stability, Financial stability is kind of their underlying mandate because it's part of maintaining the other two. You mentioned real estate, and I saw that I think for the first month and 13 years, housing prices have come down on average nationally. Isn't that just an overdue correction? Don't housing prices need to come down? It's a challenging market because it's so levered, right? Even the typical homeowner. I mean, if you talk to most people, you say, should you buy things on five times leverage? They would say no, with the exception being real estate. It's normal to say put 20% down. And so relatively small changes can cause rather big problems, which is where that risk comes from. If you look back at the very long term for real estate, the only two times in history where real estate came down on a nationwide basis at a very large level was the Great Depression and the Great Recession. That's part of why those were two giant disinflationary implosions in the credit sector. Other times you've had instances where the national home price index would hit stall speed. It would contract by a couple percentage points on a year-over-year basis or down from the highs. That's what we're in now so far, which I think is healthy after such a vertical ascent in the past few years, such high real estate prices. I think it's going to be different than 2008 in the sense that even though there was a lot of rapid buying, there was a lot less buying on bad credit in the residential sector,

at least. And so I do think we're due for corrections. It only gets dangerous when you start going straight down, right? When you start to have massive contractions in highly levered types of assets. So I think we're probably going to be more likely seeing kind of a stall speed, like just kind of like this period where things go flat, maybe things go down in inflation adjusted terms, rather than kind of fall vertically in the nominal sense. I would think there'd just be so much equity in these houses and also the loans. I mean, the credit standards have been tightened so dramatically since the last real estate crash. So I want to switch to Bitcoin.

And you think a lot about this, and I want to put forward a thesis, and you tell me whether I have this right or wrong. I'm sort of concerned or disheartened by the fact that there's a run on a bank and Bitcoin accelerates. And my fear around Bitcoin is that now some of the biggest investors in Bitcoin no longer share the same incentives around what's good for America, that a run on a bank that potentially threatens the entire banking system or the U.S. dollar is good for Andreessen Horowitz. And so they might, given some of the things you're talking about with distributed computing and real-time communications, be able to foment or pour fuel on the fire of a bank run, which sends the value of their crypto up. I mean, is that the danger of Bitcoin or am I overstating it? So, I mean, I think there are individual actors that do that. And the interesting thing you point out, Andreessen

Horowitz, I mean, if you focus on the Bitcoin community specifically, they tend to not to have very high opinions on Andreessen Horowitz because they associate that type of activity more with kind of the broad crypto 18 out of 20 of the top 20 are developing countries, which makes sense when you zoom out, because those are ones with less stable financial systems, less stable currencies, higher percentages of unbanked people. And so in some sense, these technologies have always been kind of a alternative for when you have banking problems. And it's obviously concerning to see that here in the United States, in Europe, places like that, but it's really that in and of itself is not a trend change compared to how this technology

has always been viewed on a global scale. It's just happening here at home rather than kind of abroad. But yeah, as far as individual actors using or promoting bank runs to market Bitcoin or crypto more broadly, I think is obviously a potential conflict of interest. That's not healthy. But I do think that there are other people that really view Bitcoin as something that's long-term in favor of the United States. I mean, one way I would phrase it is that in some ways it opens

borders, it opens capital flows, which is deleterious for countries where capital generally wants to get out from, authoritarian regimes. Out of the Argentinian peso, people just want out. Exactly. I mean, yeah, basically if you're in Turkey, if you're in Argentina, Egypt just got their currency cut in half. People in China want to just have capital outside of their locked system. Capital wants to get out of certain places. The United States has generally been a place where capital wants to go more often than not. And so I think it's less of a threat towards open, attractive markets, and it's more of a threat towards anything where their system relies on people

either not knowing about the outside world or not being able to get their capital to the outside world, because this is basically a bunch of little leaks in their system. I personally know someone who fled Venezuela and was able to bring a lot of his wealth with him thanks to Bitcoin. I met someone who was able to leave Afghanistan. She was a woman who got paid in Bitcoins. It was like an early kind of experiment where they were trying to find ways to pay women in ways that didn't rely on the banking system, didn't rely on, were protected against their male relatives, just kind of taking whatever earnings they might've made. Most of them got rid of it because of the volatility, but a couple of the ones that held onto it,

they eventually used it to leave the country. We forget that as many bank runs as we've had or as scary as our system might be, it's just a different level of security and trust, right? And that's not shared around the world. I've never understood if you buy into the advantage of Bitcoin, there's obviously the asset case that it's scarcity value, lack of trust in fiat currencies, you're taking kind of, I don't know, alpha risk or whatever it is, investment risk. But the notion that you also, I would think, want to exit the system and exonerate yourself or protect yourself from this counterparty risk. I've never understood how Coinbase is an AOL, just an on-ramp eventually to the web, if you will. It seems totally contrary to me that you would want to be in Web3 assets and then put it on a platform that has its own

counterparty risk. Isn't the dream of Web3 that you don't need these platforms? These exchanges are useful in the sense that they are places where liquidity happens, where prices are determined by, you know, it's kind of like any foreign exchange, right? Or gold dealers or gold exchange places, right? There are certain points of intersection between two different assets or two different monetary systems where the price is set. And so they serve a useful role in that purpose. But yeah, ultimately, especially because you don't need to rely on them for custody, I think their ultimate, let's call it total adjustable market is narrow. It only extends so far because there's only so much demand for that kind of on-ramp,

off-ramp points of intersection. Whereas I think the more interesting aspect of the ecosystem is once you get past that, once you take ownership of the Bitcoin, what can you use it for? Which obviously opens up some regulatory challenges, kind of like any new technology does. I mean, if you look at when pagers came out, there was articles about how this is going to be concerning for the drug trade. When the internet came out, it was like, this is going to be concerning for XYZ. Any type of new technology opens up, obviously, some bad actors being able to use it. Yet the real power of the space is how it allows for faster and more frictionless flow of value,

especially on a global scale. And I think kind of bring it home to that point about the global perspective. There's like 180 different fiat currencies in the world. Something like 50 of them are pegged to something else like the dollar and it's almost like a barter system if you're so in in our jurisdiction we're privileged that our money's good almost anywhere whereas a lot of these places you know you have these kind of you're in like a walled garden for where your money's good and it's there's frictions if you ever want to go in or out of that walled garden. And something like Bitcoin or stable coins and things like that allow those borders to be lessened. And so you actually have more global trade in a way, or you don't have to think about

borders as much when money moves around. And obviously that has implications and challenges, but I think that's kind of the promise of the technology. We'll be right back. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for?

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a special series from Where Should We Begin, sponsored by Klaviyo. We speak probably once every six months. Given what's happened in the last six months, where do you think there's opportunity or additional risk if you're a holistic approach to a portfolio? Should people be increasing their exposure to credit given the increase in interest rates, getting out of growth stocks? Are there certain regions? Help us manage, generally speaking, what are your themes around portfolio management or investment opportunities right now? The way I describe it is like a three-pillar portfolio. One pillar is basically an emphasis on profitable equities. I think that generally more value-oriented equities are attractive. When you have an inflationary decade or a pro-commodity decade, that tends to be more value-oriented, whereas disinflationary decades tend to be more growth-oriented because as

industries go down, it allows the valuations to go up pretty heavily. So in this type of environment, I think there's basically the risk-reward ratio is better for profitable, reasonably priced companies. Obviously, some profitable growth companies can also certainly be in that mix as well. But it's an emphasis on real businesses earning real money and that are not trading at extraordinarily high valuations that depend on zero cost of capital. So I think that's a key pillar. I think that part of that, emerging markets are a useful slice in there, places like Brazil, India, parts of Southeast Asia. I think there are areas of attractiveness that you can kind of diversify your exposure

with those equities. I think the second pillar is some of those more direct inflation hedges. So commodity exposures, energy, commodities, battery metals, things like that. Commodities tend to not do very well over the very long term. We get better at finding and producing them. But inflationary decades is when they tend to have just pretty significant outperformance. You can also add alternative monies to the mix, things like a slice of gold instead of a slice of bonds in that particular part of the portfolio or a slice of Bitcoin, kind of these alternatives, kind of scarce assets. So that whole kind of commodity slash alternative money pie. And then the last pillar would be something like

cash equivalents. So T-bills, money markets, that's an area where it reduces the volatility of the other two sides of the portfolio, gives you rebalancing opportunities. It's no longer earning zero. So there's a reasonable incentive to hold on to it. I still think that the average yield this decade is not going to be very attractive compared to the average inflation rate for this decade. But I think it'll be less bad in some cases than it was in recent years. And it does put a higher hurdle rate on investments. You have to be a higher probability of assessment that something's actually going to create value versus the idea that there's no alternative, that cash is zero and you have to buy anything else. Now there's actually a better reason to hold some of these higher yielding cash equivalents and then to

deploy capital more carefully into those other two areas, either the equities or the commodities and the monies. And at some point, everything's, or unless it's going to zero, things become a buyer and they become a sell. Is there opportunity to run into the fire here? Is there opportunity in things like bank stocks or some of these high growth, high flyers that have come off 70, 80%? I mean, it looks like, for example, the market overreacted on meta, right? It took it

just down way too far and it was trading like a mature manufacturing stock. And it's still an amazing business. And I think it's doubled since October. Do you think there's opportunities to run into the fire around any of these stress sectors? I think selectively, yeah. I think it's knee-jerk running into it is not the right move, but if someone actually knows what they're looking for, I do. So, for example, I mean, I think that the large regionals, the large diversified regional banks don't have some of the same concerns that some of the country or half the country, for example. And those are so far showing no signs of deposit outflows. And yet many of them have been priced as though they are. So I think that's an attractive area to look into. And then as far as tech is concerned, I think basically there's certainly opportunity. And you just have to be more sure that they're actually creating value rather than just arbitraging

overvalued equity, right? Because basically we've had this decade-long story of valuations going ever upward, companies underpricing their products because they're just able to sell their equity instead. And in a world where that's not possible, they can't just keep selling their equity. They have to raise their prices to keep paying their expenses. That slows down their growth. And then you say, well, what is actually still there? What does actually still make sense in that type of world? And if you can find companies that meet that, then yeah, there certainly will be, looking back from 10 years from now, there certainly will be major growth stories this decade. It's not like all growth companies fail in an inflationary decade or a value-oriented decade. It just becomes that

the tailwinds that they had are now in many ways headwinds, but there are opportunities and ones where those headwinds are surmountable because their product and their service is actually worth it, and it's actually a long-term growth story. I've been reading a bunch of articles saying the next shoe to drop in the banking sector is bonds backed by commercial real estate, And it kind of makes sense. There's a narrative, and that is the most enduring structural shift from COVID is remote work. We're still back in many cities to just 50% office occupancy. So if you have a building that was, you know, refied at a $700 million valuation, and it's worth 350, and they borrowed 70%, you know, the bond is underwater, and it hasn't been marked. Those declines in value haven't been cured or realized. And once they are, you could have more

banks scrambling to raise equity. Any thoughts on commercial-backed real estate credit? Yeah, I'm pretty concerned about the whole area. And you've already seen, I mean, some of these real estate funds have already gated the exits. They're not liquid enough to allow investors to take out their capital. So I actually am concerned about the whole space. The only caveat I'd add is that commercial real estate is a very broad category. So when we think of commercial, we often think of offices, which is obviously a huge pain point now, but it also means, for example, real estate for restaurants, right? I mean, that's still commercial real estate for whatever else that is actually people are going to.

So I mean, obviously, I think that the problems in commercial real estate are more specific in those specific areas, such as office. I am quite concerned, especially because even ones that make it through it, I mean, obviously, office is still going to be used to varying extents, but it's the leverage attached to them that makes it so unworkable. And I think that's going to be probably still a multi-year story of capital getting wiped out, debt holders taking over some of those assets. I think there's a lot of inflationary forces in the market, but that's a deflationary force. That kind of commercial real estate deleveraging insolvency story that I think is going to be like this kind of slow motion train rack. I think that's one of the deflationary forces and one of the pockets of concern in the market. Have you given any thought to how AI should impact or creates opportunities or challenges in the market? So I think that's a huge productivity tool of the long term. Sometimes I think these things get oversold in the very near term, like what they can do in a year or two. But then we underestimate, I think that's a Bill

Gates quote, like we overestimate what we can do in a year and underestimate what we can do in a year or two. But then we underestimate, I think that's a Bill Gates quote, like we overestimate what we can do in a year and underestimate what we can do in 10 years. I think that's kind of the story with AI. It's already rapidly changing how some businesses operate. Basically, it's a huge productivity tool. So far, I mean, the AI is not great for reasoning, but it is great for organization. It's great for art. I think it's going to blow us away in like five years. I think in some sense, it's a disinflationary force on certain types of white-collar labor. For the past few decades, it's been very good for white-collar labor, very bad for blue-collar labor, the whole globalization trend, automation. A lot of it's gone after blue-collar.

I think we're in the phase where we're automating some of the white-collar work, and that's disinflationary. But also for people that navigate that well, it makes them way more productive. It extends the reach of what a person can do with their workday when they have these tools that can do a lot of the repetitive or other things for them and organize them better. So I think it's a net gain for society in the long term, but it's challenging for obviously certain job profiles. And I also think that when you look globally, remote work, borderless money, let's say Bitcoin,

for example, and AI, it opens up so many parts of the market. For example, there are so many great people in Nigeria, for example, that now have more tools that they can tie into global markets and they can do work on a global scale that even five years ago, they didn't quite have the tools to do. And so I am pretty bullish on that whole space. And final question, Lynn, given everything that's gone on, do you see any geography, sectors, or asset classes that you think are mispriced to the upside or the downside? So I think that emerging markets are going to be attractive this decade. Obviously, to be very careful with counterparty risk as the world kind of, let's say, goes

from unipolar to bipolar in a sense. I think you have to be careful about having your capital in places that are either in the Western sphere or in the neutral sphere, places like Brazil or India. I do think that there is that global attractiveness. I think that as the Fed has kind of run into the ceiling for how quickly they can tighten, how quickly they can pull liquidity out of the market, as we kind of deal with our own liquidity issues in our banking system, I do think that some of these other markets have a chance to catch up a little bit.

Generally, disinflationary decades tend to not be very good for emerging markets. Inflationary decades tend to be better for them. And I think that's kind of the trend we're on this decade. I think also energy, it's been oversold very significantly recently. Obviously, it got overly euphoric during the initiation of the war, for example. There's big concerns about supply chains. And especially even amid this banking crisis, the sell-off in the energy space has been pretty dramatic. And I think in the months ahead, that space is going to be interesting because there's still long-term supply constraints

with that market. And some of those assets, I think, are selling at unusually low valuations. And they're already pricing in a pretty significant decline in energy prices. And if those prices merely stay flat, I think a lot of those are going to be returning a lot of capital to shareholders. Lynn Alden is a full-time investor and independent analyst. She has been performing investment research for over 15 years in various public and private capacities and founded Lynn Alden Investment Strategy in 2016. She joins us from New Jersey still. Lynn, thanks so much. We always enjoy speaking with you. Thanks for having me. Okay, that's it. This episode was produced by Claire Miller and engineered by Benjamin Spencer.

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