We Study Billionaires - The Investor’s Podcast Network - TIP 060 : Pragmatic Capitalism with Cullen Roche (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 60 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish. I'm your host for The Investors Podcast, and as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. Got a great guest for you today. His name is Colin Roach. Colin is the author of the book Pragmatic Capitalism, and he also manages an amazing website that has fantastic articles on financial markets. Colin is the founder of the asset management company called Orcam Financial Group. The thing that really attracted us to Colin was his white paper that he wrote titled Understanding the Modern Monetary System. In this white paper, Colin talks about the fundamental architecture of how the banking system works

Starting point is 00:01:05 and how that understanding defines where we are at in the current financial markets. Based on Colin's firm understanding of how the system works and he's been able to make some really bold predictions in the past that have really amazed a lot of people in the investing community, and that's why we really wanted to bring him on the show. So I want to just lay out a couple of these predictions that he's made in the past. The first and most impressive prediction was this idea that Colin said that inflation or hyperinflation, inflation was not going to occur after the U.S. Central Banks initiated quantitative easing. So far, Colin has been exactly right with that prediction, and that surprised a lot of people because, as everyone knows, this QE thing was just kind of unheard of in the United States.

Starting point is 00:01:43 And a lot of people, when they initiated, were saying, this is going to cause massive inflation. We're actually seeing the exact opposite thing happen. Colin was one of those few people early on that said, you guys got this all wrong. This is not how this is going to go down. And as far as I'm concerned, that adds enormous credence behind what he actually knows and understands. Another thing that Colin was saying, he was on Bloomberg multiple times, not immediately after the crash, but closely after the crash. I want to say around the 2010 through 2012 time frame. And Colin was saying, hey, U.S. equity market's going to boom. There's a serious bull

Starting point is 00:02:15 coming here. And he was exactly right with that prediction as the stock market went wild from that time clear up to now in 2015. Another prediction that Colin made was back in 2011. he said that the silver market was in a huge bubble that wasn't sustainable. He's been exactly right with that prediction as well, almost perfect timing whenever he made that prediction because now we're seeing ultimate lows in the silver market. So with those few predictions, he has a lot of other ones that he's made in the last decade that have really come to fruition. It just really kind of outlines and shows you that he really has a model that he understands

Starting point is 00:02:50 and that works that represents what's actually happening in reality. So what I really want to do on today's show is talk about that monetary model that Colin has outlined in his white papers. And I also want to ensure that we have a really good handoff to these white papers in our show notes so our audience can click on this and see all this information that he's putting out on the internet for free. So Colin, with all that said, thank you so much for coming on our show. We are really excited about this interview. I know I've been waiting for months to get you on the show. Hey, guys. Yeah, thanks so much for having me.

Starting point is 00:03:20 I really appreciate it. I also appreciate you leaving out all my bad predictions there. That was really nice of you. What's one of the things that you've messed up? Because I think that that's important to highlight, because I know I have so many mistakes. Well, gosh, I mean, this one's just sort of front and center. I don't know how many people predicted this whole China thing that's been going on this year. But I certainly overlooked it. I mean, part of it, I think, is just the opakness of the Chinese economy. You know, I think a lot of us thought China was slowing down, but it's turned out to be, a much bigger concern than I think a lot of people really expected it to be. And that's, you know,

Starting point is 00:03:57 to a large degree, I think the way that it's kind of reverberated through everything over the summer and in the last few months has been pretty surprising. I'd say that's been a pretty big one that kind of took me by surprise, even though I do a lot of global macro work. I think the degree to which the Chinese situation has impacted everything was pretty surprising. And I think for a lot of people, they're just struggling with wrapping their head around. Is the information that I'm reading and the data that I'm getting, is it real? Is it something that I can actually hang my hat on at the end of the day and trust? That's one thing.

Starting point is 00:04:33 I keep talking about this going forward because China's becoming such an important part of the global financial system. It's kind of worrisome to think that this is potentially an economy that could really start to drive global growth to a larger and larger degree. and you can hardly trust anything that comes out of the government. I've spent countless hours trying to build some sort of a model that would apply to the Chinese economy in the same way that I use models that apply to the U.S. economy. And I can't do it because the data is just almost completely manufactured and massage to the point where it's practically useful. Yeah, and I think that's the big concern here.

Starting point is 00:05:12 And we were talking about this with another guest earlier is so much of Japan's economy is pendant on their top line revenue from trade with China and China has such an enormous impact on Japan. And we've seen their market go 100% in the last two years because of this insane. They're calling it QQE because it's so drastic over in Japan. They're pumping so much money into their economy by buying back these bonds that they're drying up the entire bond market over there.

Starting point is 00:05:41 It's just, it's really interesting and it's hard to know what's... Japan's got the problem where you can't print people. So, you know, they can keep printing as much money through QE as they want to, but the bottom line is Japan's got a massive demographic problem. So it's funny because we got all these questions. We're not even close to getting near them and we're already having an awesome dialogue with you. And I've got one more question before we even hit the list.

Starting point is 00:06:06 So I'm real curious because I've been talking on the show about how I really think there's issues over in Japan. I think that they've got a lot to be concerned about, even though they're still executing this massive QE program. Do you see the China thing impacting Japan and do you see that there's trouble around the corner there? I mean, when we look at their GDP growth and their inflation numbers, it's dismal at best. Do you see it getting worse from here over there? Gosh, everything is impacted by the Chinese slowdown. Anything in the regional area there. I mean, even as far as Australia and I mean, anything in Southeast Asia really is pretty interconnected into China. Japan is

Starting point is 00:06:47 a lot more independent than a lot of the other economies are over there just because they have such a massive entrepreneurial base of their own. I mean, they have in terms of where a lot of the biggest most important companies in Asia come from, Japan has always sort of been the central hub there. So they have sort of an inherent hub of production that underlies all of their economic output. That at the end of the day, that's one of the most important. things that any economy can have. As long as you have an economic base that is really nice and diverse and innovative, most importantly, really innovative, you can overcome a lot of problems over the long term. And that's kind of one of the big things that we've seen out of Japan is that

Starting point is 00:07:33 at the end of the day, there's still a huge innovator in the global economy. And that's been the thing that's, I think, kept that boat afloat for a long time, although they have what is ultimately really just a big demographic problem inside of their economies. So they're a little more autonomous than I think a lot of the economies that are really close to China, but they're still impacted to a huge degree just because they rely on China increasingly for so much of what they export. Colin, I think it's really interesting that you bring up this demographic problem in Japan. And first and I've read quite a few books recently about valuation and psychology and how

Starting point is 00:08:14 market misprices equities. And one of the things that is repeated is how we tend to overvalue the importance of these, let's call them internal factors. Internal factors would be something like demographic, something that I guess most people know, and then a lot of people would put emphasis on that. That's just like an overall observation. You can find the academic papers and some books. How do you see that in the Japanese equities market right now? Do you think there's a general skepticism that is perhaps exaggerated in the Japanese market because of the problem that they're having, not only with the modern side policy, as president is talking about, but also with the demographic problem. Well, yeah, I mean, it's a really, to use a really crude

Starting point is 00:08:58 model of the economy is to include population growth in the model. I mean, you don't need population growth over the long term, but ideally, you have an economy that not only has productivity growth increasing over time, but also has growing population growth because it's sort of a double whammy. I mean, theoretically, you can overcome population growth. And actually, if you look at the total return of the NICA since the early 90s when they had sort of their big bubble and even their GDP, they've seen a pretty actually impressive rate of growth over time in both, despite the fact that they've had this huge demographic problem and what was it all kind of started to boil over with the big bubble that they had in real estate and the stock market there,

Starting point is 00:09:45 but then it's really been exacerbated by the demographic problem they've had. I wouldn't say that the demographic issue is something that it has to put negative pressure on either valuations or the stock market in general, but it depends because you have to have that underlying productivity base. And really, like I said before, the base of innovation, that innovation can overcome so many things, government regulations, demographic problems. I mean, we see a great example is in the USA where we see what looks increasingly like overregulated or just highly regulated industries where the innovators in the USA, they keep going other places. I mean, the financial industry is sort of the best example because the financial industry is a place where we keep

Starting point is 00:10:33 seeing basically big banks and financial innovation, sort of financial engineering skirt regulatory overreach to some degree. And the regulators are trying to keep up, but innovation keeps sort of circumventing it all. And obviously the internet and the technology space are even better examples of that. But so the bottom line is innovation can overcome a lot of big problems. And that is something that the Japanese still have. I mean, there's closest thing to true capitalism in Asia that we really have. All right, Colin. So let's go ahead and get to the actual questions we had. That was a fantastic discussion. My first question, and I really wanted to ask this to people get to know you a little bit better, was how did you get your start in investing? And more

Starting point is 00:11:17 importantly, why did you focus so much on understanding how central banks and credit cycles work? I kind of came into the markets in the, really the late 90s in the early 2000s, kind of during the big tech boom and bust. And so I think I always had a sort of inherent skepticism about the markets just because my first experience was sort of being thrown into the fire of the of the tech bubble and seeing a market where everything just seemed to go down all the time. But I basically sort of developed almost a self-taught sort of economic perspective where I probably leaned a lot more towards almost a sort of free market or Austrian economics perspective to some degree because I was a market practice, it just seemed so obvious to me that the markets operated

Starting point is 00:12:06 better when people weren't constantly intervening in them. The financial crisis kind of changed a lot of my model. I had been really trying to figure out why correlations all went to one back in 2008-09. I don't know if you remember, but back in that period, the correlations of almost all financial markets went to one, basically. And it almost didn't matter if you were. you were a value investor, or if you were a growth investor, or where you were regionally, or what asset class you were even in, when the central banks all started to get so involved and the government started to all get so involved in the economy back then, everything sort of started to trend together. And that really changed my perspective on things because it made me

Starting point is 00:12:55 realize that these entities increasingly were probably going to be involved in everything that much more going forward. And the big one obviously was quantitative easing, which was this completely new program that really, I don't think anybody really understood it. But although I'm not a trained economist, because I'm a market practitioner, I've sort of relied to a large degree on my contacts on Wall Street. So I ran a limited partnership for seven years. years basically through the financial crisis. And one of the things I constantly relied on was to understand the world better by talking to people who were kind of on the ground understanding things. So bankers, investment bankers, traders on Wall Street. These are just lots of either friends

Starting point is 00:13:42 or colleagues that I have in the industry. And it was funny when the financial crisis broke out and quantitative easing was initiated, a lot of the people that I was speaking to on the ground were telling me very different things about the way this would unfold than what you were reading in the mainstream media or even what a lot of the actual academic economists were saying. And I had this sort of juxtaposition there where I was sort of had my ear to what was an operational reality relative to what looked like almost an academic or theoretical perspective, which was more the money printing sort of idea that you got from the mainstream medium and whatnot and the sort of the driving hyperinflationary view.

Starting point is 00:14:29 Fantastic. And I just want to highlight to our audience, this paper that Colin had written definitely read this because what Colin lays out is just fantastic and it really debunks a lot of myths that I think a lot of people have. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo, Fjord and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom

Starting point is 00:15:05 Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive, currency collapse, using AI to expose human rights abuses. and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers,

Starting point is 00:15:40 the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations, and conversations. that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers.

Starting point is 00:16:15 The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while

Starting point is 00:16:58 making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide demystifying AI at netsuite.com slash study. The guide is free to you at net suite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting,

Starting point is 00:17:44 but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions,

Starting point is 00:18:19 and even enhance her product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. So I would actually like to talk about this paper because one of the things that you bring

Starting point is 00:18:57 up is the problems with fiat currencies. I think it's really interesting and it's also something that Preston and I have brought up on earlier shows. You talk about the value of any form of fiat money is ultimately derived from three key linkages. And the first one you mentioned is output and production. The second one is money supply management. And the third one is law and regulation.

Starting point is 00:19:19 Colin, could you please elaborate on that? Yeah, so money is a really strange thing when you think about it. I love kind of going back to the origin of the word credit because the word credit has traditionally been used as being synonymous with money, basically. And the word credit is derived from the Latin word crederate, which means to believe basically. And that's ultimately what money really is. is money is this sort of trust-based system of accounting, really.

Starting point is 00:19:50 It's for all practical purposes, the money is just a tool. It's a medium that we use as a record of account to basically account for the way that we interact in a monetary economy. So the reason why I really highlight these three linkages is because I think that these are the three things that really make the monetary system viable over time. So, for instance, output and production are by far, they're the base of all of this. If you don't have output in production, there's no reason for money to exist in the first place.

Starting point is 00:20:25 I mean, the only reason that a monetary economy even exists is because we have output that we want to trade with one another. So in a barter type system, we would, you wouldn't need money. You would just trade this good for that good and, you know, sort of an I scratch my, or you scratch my back, I scratch yours type of economy. But money changes the whole dynamic. Money allows me to get a back scratch from you. And then I take the money and I can go and I have basically some sort of monetary item

Starting point is 00:21:00 that is worth that quantity of back scratches, but I can use it on anything. So it basically is sort of a trust-based system that provides us with flexibility. But what's interesting here is that a lot of, of people think of money as something that maybe should be unregulated or something that the supply of should be sort of managed or massage. If you read a lot of academic work, they focus on really managing the money supply. The whole idea of monetarism is really based on the idea of the central bank managing the money supply. And it's interesting what we've sort of built in a modern credit-based system where banks are the primary issuers.

Starting point is 00:21:43 of money is really a market basis. The monetary supply really expands and contracts in an elastic way, which means that basically the market chooses how much money should exist at times by making new loans and by repaying loans. The money supply can literally expand and contract, but there's a linkage there between the money supply and output ultimately. So we can demand more money, but ultimately, one of the key linkages that makes the system viable is how well that money is actually used. So are we borrowing money and going out and speculating on the stock market, or are we borrowing money and we're actually building things? Are we building things that add real value to the economy? And they make that base of the whole financial system broader.

Starting point is 00:22:36 And that's why I kept going back to innovation earlier. Innovation is such a key. portion of all of this because it is the thing that drives ultimately output in production and makes all of this sustainable. I sort of think of laws and regulation as being, to use a bad sports analogy, if we think of all of this as sort of being something like a soccer game, we're all basically trying to obtain the balls, which would be synonymous with something like the money to try to score goals. And goals would be the synonymous with basically creating more output or production. And the government is just sort of there to set the boundaries and make sure that

Starting point is 00:23:17 people aren't committing fouls and doing things that could harm the process of trying to get the ball into the goal, basically. So government has an important process to play in terms of the system adheres to those laws. And that's really the crucial part that government plays in all of this is that government can come in and sort of be an independent part. that oversees everything that says, okay, the system is credit worthy because if you need to go to court because somebody isn't be good on their monetary promise, the court can kind of come in and intervene and they can literally, they can give credit to the money that we utilize because

Starting point is 00:24:00 people realize that they have some sort of independent party that's going to regulate and actually make this viable to some degree in the long term and uphold contracts, which is, such an important part of all of this. So, Colin, one of the things that I'm most impressed of with this white paper and some of the other talking points that you have on your website is that you really debunk this money multiplier or reserve ratio piece of what they teach in any economics course across the country. And you suggest that after the U.S. came off the gold standard that the banks have been really driving this supply of money or credit that's being created into the system.

Starting point is 00:24:38 So can you walk our audience through this idea so that we'll be. we can understand this more clearly. And just so everyone knows, Colin is effectively saying that the money multiplier used to have an impact up until this point where we really kind of came off this backed monetary baseline. And once we didn't have anything that was backed, really kind of the banks were taking control at that point. So Colin, if you could describe this in a little bit more detail so people can kind of understand your vantage point, we'd appreciate it. Yeah. So this is actually a lot simpler than it probably seems. I think the crucial part of all of this is getting the causation, right? So a lot of people tend to work from the idea that the government

Starting point is 00:25:16 controls the monetary system, basically, that the government prints money and that the government kind of oversees and either the central bank prints the money or the treasury prints the money. And that's not really an accurate way to think of all of this. I think of the government more as a facilitating entity, whereas the current financial system has really come to be dominated by private sector entities. I mean, the banks are for all practical purposes, they are the real money printers because they're the ones that when they create loans, loans create deposits. But you have to get the causation there, right? A lot of people, especially if you've taken a course on economics, you think that the deposit base, or what economists call the broad

Starting point is 00:26:02 money supply, which is basically the supply of money that banks control, they think of that as some sort of a ratio. And so you might have $1 of reserves in the reserve market, which is the market that the central bank controls, which would allow banks to create $10 worth of broad money. That's not really how any of this works, though. The way that it really works for all practical purposes is that banks create the broad money. And then if they need reserves, they tend to borrow them after the fact. So loans are actually made before the reserves are even needed. And if the reserves are needed, the central bank actually has to respond to what the banking systems needs are. A central bank is basically just a clearinghouse

Starting point is 00:26:49 that operates with government leverage that basically keeps wheels going during scary times, basically. And this is exactly what we saw during 2008, is that the Federal Reserve kept operating even when J.P. Morgan wouldn't lend in the overnight market to Bank of America. The Federal Reserve stepped in and they said, we'll make a market here. We'll lend to whoever needs it to keep the wheels greased here, keep the engine greased here. I think it's really interesting that you're talking about this, Colin, because I would really like to keep talking about the Federal Reserve.

Starting point is 00:27:22 If I have a normal household, I can run out of money. But as you were talking about, the Federal Reserve, they don't have the same constraints. One of the things you talk about in your work is also how the risk for the central bank is not the solvency issues, but rather inflation and the foreign currency currency risk. Could you explain those concept and why it's a risk for the central bank? Yeah. So again, to kind of use a really simple analogy, a central bank operates in a lot of ways like

Starting point is 00:27:52 the government's bank, basically. It's kind of been strange to think about over the course of the last seven years. One of the things we keep hearing about the debt ceiling, for instance, is coming up again. And we're hearing about how the U.S. government can't afford all of the things that it has to pay for these days. And this always kind of makes me laugh because the U.S. government has a bank that it can borrow from at zero percent. And whether that's good or bad, I don't know. I mean, I'm not making a political statement about all of this. Coming from an operational perspective, there is literally no way.

Starting point is 00:28:28 that the U.S. government can run out of money right now. I mean, they are an entity that can sell debt at zero percent interest rates. So they're literally their credit line right now is bottomless, completely bottomless. In addition to being able to tax 22 percent of all world output, issuing the world's real safe haven asset, which is the U.S. government bond as sort of the reserve currency issuer, we're inherently the entity that issues the world's safest assets, basically. There's no real solvency constraint there like there is for a household. So, you know, you might be able to run out of money. But if you had an infinite credit line, if you had basically a credit line at a bank where you could go in and you could borrow at 0%, you would

Starting point is 00:29:17 never worry about running out of money. That's the exact situation that the U.S. government is in. And yet we continually hear about how the U.S. government has some sort of solvency risk just like a household does. And it's just not true. What the government really has to worry about is creating so much liquidity or incentivizing people in such a way that you basically dilute that output base to the point where you have so much liquidity chasing so few goods and services that then you. we start to see sort of a South American problem. South America has been just a great example of mismanagement of basically fiscal and monetary policy over the course of the last 30 years, because what they've really tried to do is time and time again, they've tried to basically create money as an alternative for output. And they've never really had the output base from

Starting point is 00:30:13 which to be able to leverage their governments. And so you've had a lot of cases of hyperinflation and high inflation and then in a lot of cases really nasty currency situations and that's the big risk that you have to worry about is if you have an economy that has a fragile output base where the government then is being involved in such a way that they're trying to almost print output you can't print output really you can incentivize people to create output in certain ways but you can't print innovation and things like that and that's the problem that a lot of government governments run into. But with regards to the United States, it's a very, very unique situation. There's a certain exorbitant privilege, as economists would phrase it, because we're such a

Starting point is 00:31:02 uniquely innovative and diverse economy with diverse resource access and a really mature and diverse economy in so many ways. So there's a lot of specifics. I hate to generalize about this because I don't want to give people the impression that the U.S. government, because it has access to a, basically a credit card that has an infinite amount of money on it, that that's necessarily a good thing. But I think that coming from an operational perspective and understanding that the government doesn't necessarily have the same solvency issue as a household is really crucial for keeping things in the proper perspective. Yeah, and Colin is so interesting that you bring up the uniqueness and complexity of the American monetary system. So I choose,

Starting point is 00:31:47 I'm in Denmark and I would use American textbooks because America is so different really for everything else. Yeah. Well, and the financial systems are all different. So I wrote my paper, for instance, from the American perspective, obviously. And you wouldn't believe how many international emails I get and people asking me, well, how does this apply to Europe? Well, Europe has been a really interesting thing to talk about over the course of the last 15 years is their whole, the Euro project is sort of unfolded because Europe is an incomplete version of the United States financial system in a lot of ways. Because what you have there is basically the European Central Bank is not really controlled by a centralized government. So you have

Starting point is 00:32:34 basically a foreign central bank and then you don't have a global treasury for the entire euro system. So what you have though is you have a system that is basically united, through using the same currency, but you don't have all of these other interlocking pieces that actually sort of complete the monetary union. So it's funny, Jim Rickards says that he feels that the euro is actually a stronger currency than the dollar, or a currency that's going to hold its value better than the dollar because of that structured. Would you agree with that?

Starting point is 00:33:10 Well, the likelihood is that Europe's economy will remain in a sort of, of depressed state until they resolve a lot of this because what's happening basically is that you have an inherent trade imbalance inside of Europe. So a lot of people don't realize this, but in the United States, for instance, we have trade imbalances here. We basically have 50 little countries and we all use the same currency. But a lot of these countries are a lot more productive than others. So New York and Texas and California are kind of the big ones. They're kind of of the germany's of the euro system. So they're the biggest exporters of goods and services. And this naturally creates a trade imbalance inside of all of the states. But what happens,

Starting point is 00:34:00 a lot of people don't realize this is that you don't get big Greek-like financial crises every once in a while inside of the United States because you have a central government that offsets a lot of the imbalances that occur. So for instance, a lot of the southeastern states, like Alabama and Mississippi, they are huge importers of these goods and services, which means they're basically exporters of dollars. Okay. So they're just like Greece. And in order to offset the income outflow, they basically need some other source of

Starting point is 00:34:34 income. It has to come from somewhere. Does it come from borrowing? Do they issue more municipal bonds? Or do they get money from the federal government? Well, in the case of the USA, they end up getting. huge amounts. They're the biggest beneficiaries of federal funding. So the big states like California, Texas and New York, they actually get as a percentage of their GDP, they get a lot less federal

Starting point is 00:34:59 funding than a lot of the small or less productive states do. And the situation, though, in, for instance, with Greece is Greece doesn't get federal funding from anywhere. They actually are being told that they have to de-leverage, that there's no support mechanism for what they're doing basically, that they have to implement austerity. I mean, Greece is literally going through a depression right now. The closest thing to a modern day depression that really any fairly substantial economy has gone through, it's just not a good situation for Greece because they don't have the political unity that's required to make their system viable. But at the same time, Germany doesn't want to let these smaller, weaker countries out of the euro because Germany is

Starting point is 00:35:43 the biggest beneficiary of the weak euro. So if you had all these weaker peripheral countries peel out of the euro, ultimately, that's an inherent price hike for everything that's produced inside of Germany because what happens is, for instance, if Greece and Italy and Spain and Portugal all left the euro, they'd bring back their old currencies. They would become just infinitely more competitive against what is essentially becoming a German currency, basically. That's phenomenal. I love that discussion. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vantanza automates

Starting point is 00:36:29 your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires.

Starting point is 00:37:15 Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments. The S&P 500, NASDAQ, BIC, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4x, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for.

Starting point is 00:37:53 See a trading opportunity, you'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify.

Starting point is 00:38:23 Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings account. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes, thanks to the Fundrise Income Fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years.

Starting point is 00:38:59 Visit fundrise.com slash WSB to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Changing gears just a little bit, Colin, so when we look at the high yield bond market right now, it's a really popular topic. You got guys like Carl Icon out there basically saying the doom and

Starting point is 00:39:47 gloom is coming. And a lot of this has to do with the fact that a lot of people are selling out of this bond market, which is raising the yield in the high yield bond market. In general, are we seeing the credit cycle starting to contract, regardless of whether the Fed raises rates here in the federal funds rate in the near term, say they do it in the next six months. Are you seeing worldwide the credit cycle starting to contract? Is this starting to spin in the opposite direction? And if so, what ramifications or expectations do we have moving forward? Well, so we're not technically in a de-leveraging, especially in the United States. I think it's important to be really specific about which sectors we're talking about.

Starting point is 00:40:28 So when we look at, for instance, in the United States, what happened in the period from basically from 2002 up until barely recently, really 2013 was we had this huge boom and bust in credit. Specifically, it was household credit. You had lots of people speculating on houses and doing sort of funny things with the housing ATM situation and buying. cars they probably couldn't afford. And so household credit really boom in the 2002 to 2007 period, basically. What happened was basically that created a very fragile sort of situation where we had basically built a credit boom based on a very fragile pricing mechanism, which was the real estate

Starting point is 00:41:17 market. We had such a huge increase in real estate prices that the value of the assets that was underlying so much of this debt, it made everything very unsustainable. And when the price of houses began to basically contract, you got this domino effect. The business sector in the United States has been actually really healthy over the course of the last 15 years. And it's interesting that what we've seen over the course of the last, really the last five to 10 years as the credit crisis has played out to some degree, as households have de-leveraged in the United States, businesses have actually leveraged up. So we've had a big boom in corporate borrowing in the last five years.

Starting point is 00:42:01 And obviously the biggest player in all of this was the government. The government became a huge borrower in the post-price period. And this offset what was happening at the household level to a large degree. So you have to kind of get a little bit more granular. We're not having a broad de-leveraging in the United States, but we're still in a situation where relative to, historical norms, the household sector in particular is still borrowing far less than they have historically. And so this is a sign of still very tepid balance sheet strength because this is one

Starting point is 00:42:38 of the main drivers of the economy. Ironically, you want the money supply to be expanding through loans over time because that's a sign that things are actually healthy. When businesses are borrowing and people are borrowing and utilizing that money for good purposes, for good productive purposes. That's a sign that things are actually good. You want to see that happening. Really good answer, Colin. I have a question about exchange rates that I've been thinking of quite a while since the Red Jim Ricketts paper. And he's talking about the advantages of the American dollar being packed to something and the pros and cons of doing it. So, first of all, he might be talking about paying dollar to gold like we used to. The other one would be

Starting point is 00:43:23 paid to another currency and he also explores the opportunities of being pegged to the basket of currencies. Could you imagine a situation for your part of view where it would be beneficial for Americans? Well, I don't really understand the rationale for doing this because I think this tends to be a function of the view that the government controls the exchange rate, that the government controls the money supply more importantly. And historically, there have been times where governments have directly controlled the money supply. But in today's monetary system, for all practical purposes, the money supply is really controlled

Starting point is 00:44:03 by the private sector. The private sector plays the most important role as the issuers of money primarily through loans. And so I don't see what the benefit would be to pegging the dollar to either a hard commodity or even another currency. The general goal is to basically to tie the hands of the government to some degree to make it more difficult for them to issue money. But we've sort of seen this. I mean, quantitative easing is the best example that I like to use. The government is a facilitator of the monetary system, basically. And so to use a really simple example of what quantitative easing is, quantitative easing is basically changing the composition of private sector financial assets.

Starting point is 00:44:48 What the government does is when they implement quantitative easing, the central bank basically prints reserves, or you can think of them as printing deposits into the financial system and exchanging them with some other type of financial assets. So, for instance, if I hold a treasury bond, maybe the central bank comes to me and they give me a deposit and I give them the bond. I'm not wealthier. I don't have more money. My net worth hasn't increased. In fact, the price. private sector's net worth is exactly the same after quantitative easing has been implemented. All right, Colin. This is our last question. What book do you recommend? And specifically, what investment text has drastically shaped your thinking?

Starting point is 00:45:31 So this might actually surprise a lot of people, but I'm actually a huge advocate of simplicity. So although I kind of work from what is a seemingly complex perspective of the world, my goal with all of this is actually really vastly simplify everything to sort of condense all of this. into very simple forms of understandings. And the book that I love that I think is just the most direct, simplistic way of understanding what is generally the best way of allocating assets for people is John Bogle's little book of common sense investing. I think that he just does a masterful way of explaining how simple this whole process should

Starting point is 00:46:11 be. At the end of the day, although a lot of this can get bogged down in the complexities of all this stuff endlessly, if you can really simplify all of this as best you can, I've always been a huge advocate of simplicity. And I think that Bogle just is sort of the master it. All right, Colin, just fantastic information. We want to make sure that everyone in our audience has a handoff back to your different sites and all the things that you have on the internet. So please tell them where they can learn more about you. Yeah. So the best place to go is cragcap.com. That's PR, A, G, C, A, G, C, A, the website's pragmatic capitalism. And that's just, it's my personal blog, but I have, gosh,

Starting point is 00:46:55 I mean, I've posted so much sort of educational material. There's so much, I think there's so much misinformation out there about the way that the financial markets work and just the way that the monetary system works because of really people's behavioral biases and more importantly their political biases. There's just so much misinformation out there about the way things work. And I like to view all of these things sort of through the perspective of an engineer. If we can understand how the monetary vehicle works, we can understand what certain pedals do and gears do and how they operate in certain ways. And so a lot of my stuff is just very operational and educational.

Starting point is 00:47:35 And I don't know if it's all right or applies to every monetary system out there. But I think a refreshing sort of perspective because it's operational. Fantastic. Stig, did you have anything else? No, not other than Colin always has a standing invitation to join us on a podcast. I mean, this was amazing right above Alley. Awesome. Thanks so much, guys.

Starting point is 00:47:57 It was really a blast. I hope I wasn't too all over the place. I know we covered a lot of ground, so. No, it was fantastic. Thank you so much for coming on the show, Colin. And I'm sure we'll probably send you another invite here in the near future. So thank you so much. That would be awesome.

Starting point is 00:48:12 Thank you. All right, so this is the point in the show where we take a question from the audience, and this question comes from Matthew Wong. Hi, President Stig. My name's Matthew. I'm calling from Ireland. I'm a huge fan the show. My question is just from relation to the low oil prices, which I'm hoping to get some exposure to.

Starting point is 00:48:30 I'm reluctant to buy into oil ETS. I think that the 12-month future contracts that would have been locked in by some oil companies around this time last year at the decent prices of whatever around $100 a barrel. Those will be expiring soon and I can see multiple companies going bankrupt in the next six to 12 months as long as the Saudis continue to

Starting point is 00:48:55 keep the oil prices down. So I'm reluctant to buy into the ETFs just because obviously that portfolio will then include some of these companies that are more likely to go bankrupt and I guess that leaves the individual companies. I've been considering maybe Phillips 66, the fact

Starting point is 00:49:10 that Buffett invested in them gives them a standard of approval. But yeah, my question really is just, are you guys investing in oil ETS? Thanks a lot, guys. Appreciate it. So Matthew, this question is really a good question. And I think that this is one that a lot of people in our audience have. So I am not right now. I am not investing in anything that's oil related. And that doesn't mean that that's right. That just means that I'm a little scared and timid to dive in at this point without really knowing how everything's going to shake out. Something that I can say that I'm kind of surprised by, and I know we had Trey Knapp on the show, he said he was surprised by the price action and the oil commodity, where it really went down.

Starting point is 00:49:51 It was down into the $39 level for basically a couple days, and then it came back out, and it's now up at like $45 to $50, and it's been kind of bouncing around that $45 to $50 range. What I find really amazing is our friend Morgan Downey, he told Stig and I specifically, He said if oil drops down into the $30 range, it will only be there for a couple of days. He was dead right. I mean, dead right. Now, going to where do we go from this point forward and into the future? So my opinion is that the Saudis and some of the other countries that produce oil at a very cheap level,

Starting point is 00:50:26 like they can pull it out of the ground at $10 a barrel and still be profitable. I really think that they have this approach that they're going to try to keep oil at the $50 to $60 range. I really think that that's going to persist until they shake out a lot of these companies that are like the frackers up in Canada, the oil sands. I think they are trying to demolish that business so that they can gain their market share back in the long run. I think this is a long-term strategy.

Starting point is 00:50:53 That's what I really think is happening. I could be 100% wrong with that. I don't have any insight source over in Saudi Arabia or anywhere else that would be telling me this. This is just from the different articles that I read and what I think they're really trying to do is get their market share back. And I think they're trying to do that by supplying the amount of volume of oil that they're producing until these defaults actually start to occur. So that's why I'm waiting. That's why I don't think that it's going anywhere anytime soon.

Starting point is 00:51:21 And I really don't think that I'm missing the opportunity because I think there's more to come. I don't think that we're at the bottom here. I think that you're going to see more of this play out as time goes on and things mature and develop. So I don't feel like I'm missing the boat here. I think that it's going to be something that persists for a little bit longer. I do believe, and I want people to understand this, I think there's a huge opportunity here, a huge opportunity. But I think it really depends on when that oil price is going to start coming back up and start to go higher. Until that, you start to see that shift, that consistent shift, start to take place. I'm just going to hold tight and maybe get in a little too late, but I think that I'm going to mitigate potential risks, especially from a global standpoint,

Starting point is 00:52:04 point by waiting for that. So that's my opinion. I'm really curious to hear what Stig has to say. Well, first of all, Matthew, I think it's a great question. And the reason why is that you're seeing cheap oil and you're thinking opportunity. You're not looking at cheap oil and thinking that's a problem. I need to run away from that. That's a question from a real value investor. So first of all, immensely props for that one. Contrary to Preston, I am actually invested in oil. I'm not invested in an ETF and it's really not on purpose. I don't know it sounds strange, but I don't have the same access. So for instance, if I here in Denmark try to invest from a form 1K, it's not legal because

Starting point is 00:52:48 here in Denmark, the authorities have claimed that it's too risky. We don't know enough about American ETFs, so we cannot allow Danish investors to hold American ETF. So if I was to answer your question, I'm not, but I would really like to end. I wrote a blog post about investing in all ETFs, and you can find that on TheInvestProtcast.com, and it's on the blog section. So I want to comment on the oil ETF piece of this. So I would think that investing in individual companies is going to end up being a little bit better for an individual.

Starting point is 00:53:20 I think that the big, large cap companies that have strong balance sheets are going to be the ones that benefit the most from all of this, simply because they're going to be able to buy up the capital resources when these companies do go bankrupt and some of these aren't able to produce and be profitable. They're going to have fire sale opportunities for large cap companies that have managed their finance well when they buy their capital assets. So that's why I think maybe going after individual picks in companies that have really strong balance sheets and that have been managed really well through the years. I think those are the companies that are going to benefit most from this after it does start turning around. Great point, Preston, and you might well be right. I'm investing individual stocks right now, actually just a few weeks ago I bought into them and with these strong balance sheet, as you suggest, and could they go lower? Well, of course they can. The reason why I do still invest in them is that

Starting point is 00:54:15 I'm looking at 3% yield right now, and basically this is for companies I consider close to be risk-free, and I kind of feel like I'm waiting for a strong upside. Now, I want to say two things. I am looking to increase my exposure if I see a severe price drop again. The second part, which is very, very important too, is that I could very easily be wrong. And if I'm wrong, I still want to be exposed if you don't see the drop. And I miss my shot to invest by the price alone. Okay, so that's all we have. We're going to go ahead and send Matthew a free signed copy of our book, The Warren Buffett Accounting book for asking that fantastic question. And if you're like Matthew and you want to get your question played on our show.

Starting point is 00:54:57 Go to Asktheinvestors.com, and you can accord your question there. So we'd really like to thank our guest, Colin for coming on the show. As you guys can see, Colin is extremely smart. We highly recommend all of his white papers. We're going to have a link to all those on our show notes, so make sure you check that out. And we just want to thank our audience for joining us today. We really appreciate everything that you guys do for us. So with that, we'll see you guys next week.

Starting point is 00:55:22 Thanks for listening to The Investors Podcast. to more shows or access to the tools discussed on the show, be sure to visit www. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the investors podcast by going to www. www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP 060 : Pragmatic Capitalism with Cullen Roche (Business Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.