We Study Billionaires - The Investor’s Podcast Network - TIP 068 : Current Market Conditions and Michael Lewis' Boomerang

Starting point is 00:00:00 We study billionaires, and this is episode 68 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 Stig Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host for The Investors Podcast. and as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And I'll tell you, folks, what an exciting week we're experiencing. Right now, it is 8 January 2016. The new year has arrived, and let me tell you, it's been an interesting start to the financial markets with the way things are leading off here. I saw a stat that said, this is the worst opening for the first week that the stock market has ever had, worse than anything that they've.

Starting point is 00:01:03 saw in the Great Depression, and it showed, I had this chart. In fact, maybe we'll add it to our show notes so people can see, but there was a chart that laid out the first week opening of every new year over like the last hundred years. And this is the worst opening that we've ever seen. So we're going to talk about that at the start of the show. We're going to talk about these current market conditions, all the stuff that we've really been talking about for the last year and been warning people since about February of 2015. We're going to be talking about all that stuff this morning. In addition to that, we had read a book, and the name of the book was Boomerang, and it's also another Michael Lewis book. We didn't really care for this book, but we're going to

Starting point is 00:01:39 do a little bit of a book review. We also have the executive summary that we're going to send out to everybody for our subscribers on the show, and we'll talk about that later in the show, and we probably won't hit on it too much because there really wasn't too much that we really wanted to talk about. But anyway, we're going to go ahead and start off the conversation with the current market conditions. So I want to throw this quote over to Stig and just see what. what do you think. So yesterday in Bloomberg, they ran an article, and that was on the 7th of January, and it says billionaire George Soros has a quote, and his quote is, China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets, there are

Starting point is 00:02:19 serious challenges, which reminds me of the crisis we had in 2008. So George Soros, who's well known for breaking the bank of England, he's a hedge fund firm, gained about 20, percent a year on average from 1969 to 2011. He has a net worth of $27.3 billion. Now, I know there's a lot of people from the political side of the house that really don't care for George Soros, but we're going to take all of that. We're going to put it aside, and we're just going to talk about his financial performance and his opinions in the market right now. So Stig, what's your opinions on Soros's quote? Well, first of all, I always like to monitor what the Soros is doing. I think it's interesting. I don't think it's a long-term play what he's really talking about. I think he's really

Starting point is 00:03:03 talking about a short-term adjustment, at least short-term, say something like one to two years, because the way that he's often playing is that he's playing on monetary policies, for instance, which might last like a one, two, two, to three years, whenever that's playing out. And what he's doing, and you said it yourself, Preston, is that he is a heads fund guy. So he is typical going long something, and then he's going short something else. to minimize his exposure. And what I can hear that you're saying is that right now he's not necessarily just saying that China is bad. He's also saying that China is worse than what he will probably compare it to. So if I had to throw it back to you, would you say that right now

Starting point is 00:03:44 his play is to go along the U.S. and then short China? Yes, absolutely. I think it's interesting to see that Drunken Miller is following a similar approach to George Soros at the moment. And if you don't know him, he is, I think his net worth is something like $4 billion and he's also a heads-to-mania. Actually, he used to work for Jodzor, so I probably shouldn't be too surprised that they're doing something similar. But what he's doing right now is that he's shorting the euro, but he is still going along the US dollar. And what he is saying is that the reason he's doing that is that he sees the monetary policies for those two regions differ. He is seeing that Europe will still keep lowering the rates. So he is thinking that we might see a further devaluation of the euro.

Starting point is 00:04:32 So again, this is Euro, this is not China, but the play is somewhat the same. So I want to talk about an idea here that, you know, it might be wrong, it might be right, I don't know. But for me personally, whenever I get in a condition where markets are overvalued, you know, some would argue they're severely overvalued over the last year, I have a tendency to really be attracted to the ideas. and the opinions of people that have a track record of having great performance during stock market crashes. So those people for me are George Soros, Stanley Drunken Miller, Ray Dalio. Those kind of guys just kill it. In fact, they make a lot of their money and a lot of their gains during market crashes.

Starting point is 00:05:18 So for me, those are the people I want to listen to. You know, Warren Buffett, I love the guy. Absolutely love the guy. In fact, I mean, Stiggin, everyone knows. Stig and I have written all these books. We've built websites around Warren Buffett. But the fact of the matter is Warren Buffett gets crushed during market crashes. He does.

Starting point is 00:05:36 He's on record. He said it himself, I've lost 50% of my net worth five times or six times from all the market crashes when they occur. So I'm of the opinion. I don't really want to study Warren Buffett during these times where we think that things are overvalued. I want to pay attention to these Stanley Drunken Miller kind of guys who just, kill it. I mean, these guys just murder it during market crashes. These guys might have a 70% positive gain in one year because of their positioning. So I recently wrote an article on 1 January 2016. And I have some videos in there, a video with Ray Dalio, a video of Stanley Drunken

Starting point is 00:06:12 Miller, a couple others, Carl Icon, and just some of these opinions. And one of the things that Stanley Drunken Miller talked about in this video that was just published in December of 2015, just last month, Stanley Drunken Miller made the comment. He said, if you're the type of person that's going to be wanting to make real gains in the next year, next two years, he's like, I think you've got to step away from equities or stocks. He said, if you're trying to invest in stocks and make money in the next year or two, I think you're really going to have a hard time. You're really going to have to step into the commodities and currency space

Starting point is 00:06:44 in order to probably have some pretty good and decent returns. And I totally agree with that. I know I've said that exact thing a couple times in the podcast within the last year where I don't think equities is really the place that you're going to make a lot of money unless you're potentially shorting them. So I think that that's a really important concept. And I also want to hear Stig's opinion on focusing on those types of people whenever you're in this type of market condition. I want to hear what your thoughts are on that, Stig. Well, so I'm really happy to say that, Preston, because I often get emails from people.

Starting point is 00:07:16 And sometimes people are saying, ah, you and Preston, you always agree. on everything. And like, I don't know, it's a bad thing. But to some extent, I guess it's a good thing that we do agree on most things. I think I agree with you that the people to look for is not Warren Buffett, but it's people like Drunken Miller, it's people like George Soros. Another gentleman that we're talking about later in the book, Kyle Bass, someone that really thinks out of the box when it comes to crashes. We'll definitely discuss him more later. But I'm still more into value investing and Warren Buffett. Like I can definitely see the the points of, say, going into commodities because of the problems that we now see with currencies. I can definitely see why it might be a good idea

Starting point is 00:08:01 to go into shorting S&P 500 or shorting, whatever. But it's just not my play. I think for me in 2016, I would look at equities carefully, and if I find a good business that I really like at a good price, I wouldn't be surprised if I would start investing in that. I'm not ready, at least not yet, to go into other asset classes. I'm simply not comfortable with that. So I would actually like to ask you, Preston, because you are actually thinking about commodities right now. Why is it that you think that commodities might be a good play?

Starting point is 00:08:40 Well, I think commodities is a horrible play today at the start of the year, but I think that it's going to be a fantastic play potentially by the end of the year. And that's what I'm really taking close watch of. And I think that, like I said earlier, the main catalyst that I'm really looking for is the U.S. federal, I'm sorry, the U.S. Fed Central Bank adjusting their current position of, hey, we're tightening. I mean, you had Stanley Fisher come out and recently and said, yeah, we're going to tighten four times this year in 2016. As long as they're sending that message, this is going to continue to get worse. I promise you, this is not going to get better as the Fed is saying that kind of stuff. As soon as they change that and they start signaling, we're going to have to ease or we're going to have to do something that's more complimentary with our policy. I think that's when you're going to really start to see people start to try to front run.

Starting point is 00:09:38 their next decision of a major, major devalue on the dollar, they're going to have to do QE. I mean, the next QE round is going to be just massive. I mean, massive. You thought you saw a lot of QE in the past. Just wait until you see the next one. And I think whenever they start, just even initially signaling that, you're going to see, A, I think you're going to see gold really quite solidify, if not start to move in a positive direction at that point. I think that's really the key variable with gold is when they start just signaling that something's going to happen, you're going to see gold really start to take off. And I will be putting that play on. I promise you, I will be buying that pretty heavily.

Starting point is 00:10:23 And that's something that, you know, a lot of value investors, especially hardcore Warren Buffett value investors, they're probably covering their ears and they're saying I'm an idiot. But at the end of the day, we'll find out who is right and wrong. And I'm not saying that because I'm boasting or I've got a knee-go. go, no, definitely not. I could be completely wrong, but I can tell you, I'll probably be taking a fairly large position in something like that. The other thing that I'll be looking at is commodities in general, because when you look at the commodities index, I mean, it is getting rushed, absolutely crushed. And I think that the turning point for that is going to be really two things. I think it's going to be, A, the monetary policy change, because that's going to be the point

Starting point is 00:11:01 when you're saying Fiat currencies, there's not this run on Fiat currencies. That's what you're seeing right now. You're seeing a run on Fiat currency. So the value of those are going to be going up. And so that's why commodities are going down. What you typically see is that commodities and currencies work in opposites. When commodities are doing really well, Fiat currencies are usually doing, performing poorly relative to those commodities. Then you see the inverse of that play.

Starting point is 00:11:27 And so as the Fed starts to adjust that, I'm going to be watching commodities in general, particularly oil very closely. There's a couple other commodities out there that have just been a, abused. I'll be watching those very closely for them to start changing course. Now, the concern I think that you have is that the supply and demand on this stuff is still out of whack. So even though the Fed adjust their policy, you still need to see the competition in a lot of these sectors kind of die out and get, you know, kind of crushed, particularly in oil. So even though the Fed might change their policy, I'm still going to be a little hesitant to

Starting point is 00:12:03 buy into oil until I start to see kind of a detox, if you will, occur in that sector. Whenever I see that happen, let's say we start seeing a lot of defaults in the oil sector, I'm going to be watching that very closely and starting to take a position. And I haven't decided whether I'll take the position just straight in the commodity because I think that that's going to rebound faster than the companies. I think there's going to be a little bit of a lag for the companies to start performing well again. But time will tell.

Starting point is 00:12:30 I'm just going to continue to watch it and try to take it. take that position. Yeah. So, no, if people out there were thinking, yes, finally Stig and Preston, they disagree on something. I don't know if I necessarily disagree with Preston on this one. Preston has definitely done very well. And he is definitely also looking more careful at things like currencies and oil price, something than I am. So when I say that is because, like, I took a position in oil when it was like, I don't know, 80 bucks. And then I took another position when it was 60 bucks and another one because it was 40 bucks so like I'm looking at the fundamental saying do I like the price and if I like the price I would definitely buy into it if it goes up it's good if it goes

Starting point is 00:13:12 down so I can probably buy something more one thing I want to add is that I think Preston's strategy is really good I think especially if he knows how to time this and he's been a lot better than me so should probably just listen to him is that one thing to keep mind is that demand for oil is actually still is still going up in 2015 the demand, like everything in commodities, the currencies, whatever, it's all about supply and demand. And if you look at the demand, the demand for oil has still gone up in 2015. So you heard about like the oil price being slammed and you're thinking, it doesn't make any sense. Demand has gone up.

Starting point is 00:13:46 What's happening? Well, it's no surprise. The supply has just overfotted the market. So it's not enough. His demand has gone up by a million barriers a day, whatnot if you see this huge supply. And I think whenever you hear, for instance, news from China, China is not using as much oil as they're used to it. The growth is not as high as it used to. Right now, China is using something like 11 million barrels a day. The US, just for Kerr-Perosing, is using 18 million bells a day. But whether or not they're using, say, 300,000 barrels more or less, that is not what is moving the market right now. What's moving in the market is both the anticipation, but also the amount of oil that's flowing the market. And once you see that, stopping. I think that is probably what you're looking at present. That's when you will see the shift in the oil price. A little bit of my concern, too, is if you do start having this global

Starting point is 00:14:38 contraction with the credit cycle with where we're at, if that does happen, the demand is going to also decrease. It's going to be less than what they're thinking it's going to be. And I think that that's something that, you know, allows me to continue to have the position that I'm not going to be late to the party here with oil, with respect to oil. I think that that price, down in the $30 range. For me, when I'm looking at the next year, I look at oil really $50. If it gets above $50, I'd be very surprised. It could. It could absolutely shoot higher than that. You know, billionaire Boone Pickens had this interview with Carl Icon. Boone Pickens said, you know, now this is the best part. Boone Pickens in his interview with

Starting point is 00:15:22 Carl Icon in December said that in six months from now, oil is going to be $70 a barrel. Carl Icon was like, yeah, I'm not so sure about that. I agree with Carl Icon. I do not see oil being at $70 and six months from now. I could be wrong. It could be. If this thing unravels itself a whole lot faster than I'm expecting it to, like let's say the next month or two months,

Starting point is 00:15:42 this thing just totally unravels itself, then maybe, yeah, you could see it by six months, but I don't necessarily see that happening. What I think you see oil up at $70, you're talking like a year from now, if not more. So the interesting point that I had is if you rewind the tape six months, months back, Boone Pickens was saying that oil would be $70 today. So he's been saying that catchphrase for quite a while and it's really not catching on. He's not able to actually

Starting point is 00:16:08 substantiate his position. And let me tell you, Boone Pickens, I mean, this dude's been in the industry a whole heck of a lot longer than Preston Pish has and he's knee deep in understanding this stuff. So he's maybe somebody to listen to. I just want to throw that contrarian point of view out there by another billionaire that has a different opinion than me. But I'm standing by. And those are really the two critical variables for me, which is the defaults, a large, substantial amount of defaults in the industry and also the Fed changing their policy is really going to be my turning point where I try to start taking position. Yeah.

Starting point is 00:16:38 And Preston, I think it's really interesting you talk about that and the problems that you see in the oil sector right now because still that's just very, it's a different approach than, for instance, what I do. Because you're saying, okay, so you have a lot of problems in the oil sector, you want to stay out of it or at least wait until it drops. I'm definitely still seeing the same warning signs as you are. But for instance, I took a position in Exxon not long ago because Exxon, obviously they will be hurt, but this balance sheet is super strong. They'll probably still be making money in years to come.

Starting point is 00:17:08 I just want to say, like, that's what I'm saying. And if something should go wrong in the sector, I think you're right. It might be. The time for me is just too tricky. And this is the reason why I keep putting the decision off, because at the end of the day, if oils at $30 a barrel, these oil companies have getting, they've had a very horrible last two years. I mean, horrible. And I think if you bought them at the price that they're at right now and you didn't look at it for five years and you opened up your account and look, it's going to be a very good investment

Starting point is 00:17:39 for you. I fully believe that. But for me, I feel like I could still get that same price. My opinion, I feel like I'm going to be able to still get that same price in six months from now. and I think that I can make a whole lot of money in other investments between right now in January 2016 and call it the middle of the summer. That time frame, that six month period of time, I have other things that I'm doing with my money that I don't particularly want to talk about on the show because they're very speculative and it's not something that I really even want to put that thought in people's minds because it's such a speculative thing. I want to talk about investments on the show. I don't want to talk about speculation and potentially because this is a great topic. The idea of conviction, if you're the type of person that makes an investment and you fully, I mean, just really have a lot of conviction behind that position because of the knowledge that you've accumulated on it,

Starting point is 00:18:34 you're going to continue to hold that position. And if that position moves against you, if you have a high level of conviction, you're going to buy more because you have this opinion, you have this theory that it's going to move in a certain direction. So I get in these positions where I have a lot of conviction behind something and I'm very comfortable buying it. But if I told somebody else about that position, it would take me a day to substantiate why I might have such a high level conviction and theory behind why I have it. And even then they might not fully understand or have the same opinion of why I have it. And what I don't want to do is I don't want to throw out these picks and these ideas that are a very complex ideas that are, macro ideas or whatever, and people just action them. And then they have no conviction. And then when

Starting point is 00:19:19 it moves against them five or 10 percent, they sell out of the position. Okay. That's what I want to avoid. And that's why I don't talk about all the things that I'm doing, especially the speculative things, because, A, I don't want people to be speculative. I think when you get it to a certain point with your investing, you can be a little bit more speculative than not. But I really want people to focus on investing. And I think right now, and this is what I wrote in the article that I published on 1 January, I think one of the best things for people to be doing is having a fairly substantial cash position. We beat up on Warren Buffett a little bit, but you get a Warren Buffett's balance sheet on Berkshire Hathaway, and the last one that I saw was what, $70 billion of

Starting point is 00:19:55 cash that he's sitting on, it's a lot of money. And so, you know, we're saying he doesn't perform well in the market, basically because Berkshire Hathaway's, you know, victimized by the people that hold the shares and sell it. But at the end of the day, Warren Buffett is a very important. very smart dude and he is preparing for this in a very good way. He's just not doing the Stanley Drunken Miller and George Soros place. He's not. He's going to sit on cash. And that's what we're recommending for the audiences that you would be in a substantial cash position. 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

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Starting point is 00:24:23 Go to Shopify.com slash WSB. That's Shopify. dot com slash w sb all right back to the show yeah well war buffett does better than the market you know when there's a downturn in the market but he doesn't do the same play as the heads of fun guys that actually profits during the downturn so what warm buffet does is that he loses less than the rest of the market which is also extremely valuable obviously i have another point to what you're saying president about not always disclosing everything that you're doing and i kind of struggle with the same thing because we're here to, I don't know if we're here to guide people.

Starting point is 00:25:02 I think that's up to people from themselves to determine that. But I think in a way we are obliged to say what we're doing because I just don't want to talk my position to thousand and thousand people. And then, you know, people can have this thought that, wow, Stig is speculating that people do as you say and who do something that's opposite. But at the same time, you don't want people not necessarily in a bad way, but to be messing with your head. Like, you don't want to be, hey, I'm stick. I've been investing in oil. And since I have that,

Starting point is 00:25:31 and since I said that to so many people, I can never change my position. And I think that's also very important to stress. So hopefully you will have a chance to meet Preston and I out in Berkshire. And we might be saying, like, oh, stick will be saying, I'm short oil. And Preston will be saying, I love oil more than everything. I can't see this happening. But, you know, take it from what it is. And like, it's also important for us to stress that it's nice to have platform where it can change your mind. So basically this is, I think President just said this, but we're recording this on January 8th. But, you know, tomorrow we might do something completely else. And now I've said that I took a position in Exxon not too long ago.

Starting point is 00:26:07 Whenever we meet, I might think it's the most horrible company you can see out there. And right now, the reason why I did that, right now is just that I don't see the same place as Preston. At least I don't have the courage to pull the trigger on the same alternative asset classes. So right now I'm just saying I can get what like three, four percent, whatever dividend yield at the moment and just wait for the rebound. That's my play. If I can get the kind of return 2016 while I wait for the rebound, I'm heavily exposed to oil, that's fine. For me, and Preston might have another opinion because he's looking somewhere else. Yeah, my approach is drastically different.

Starting point is 00:26:46 But I'm a lot more aggressive. Like when you meet our personalities, I'm a lot more aggressive. My plan for 16 is to have an epic year, but sometimes those end in chaos and disaster. So it's definitely a different approach. But what I want to talk about on the show is good sound advice. So let me talk about this. So I had a friend that I said, you know, I think that a cash position is probably a very good position to be in going into 2016. This person took my advice.

Starting point is 00:27:15 And the first week with this open, you know, the market was down, let's just call it almost 10%. And so I was talking to this person on the phone and I said, wow, you had one heck of a week. You basically, you know, made $100,000 in your position. And the person said to me, they said, what do you mean I made $100,000? I didn't make $100,000. I didn't make anything. And I said, yeah, but it's always relative to something else. I said, if you would have continued to basically own the index or the S&P 500, which is kind of what the person had, if you continued to own that, you would have had, you would have had, you.

Starting point is 00:27:50 you know, $900,000 in your portfolio instead of a million. And the person was kind of like, yeah, yeah, I guess. And I'll tell you, folks, I think that this idea is the trap. This idea is the trap that gets investors like nothing else because they don't understand the power of protecting your downside. We had William Green on our show. And the very first person in William Green's book, he wrote this book that was just a fantastic book that outlines the greatest minds of investing. And one of the very first people in his

Starting point is 00:28:25 book was a gentleman that was, he just recently passed away. This man shorted the market during the Great Depression. When the market crashed during the Great Depression, he was actually shorting the stock market. So in this book, in big giant quotes, he was asked, what's the most important thing investors need to know? And what this gentleman said, single-handling most important thing investors need to know is how to protect their downside risk. Okay. And I totally agree with that. And I think that the problem that a lot of people have is a psychological problem that if they don't feel like something is actually going up or progressing, they don't see that as a win. So going back to my friend that I was talking to on the phone that basically had a $100,000 week.

Starting point is 00:29:09 In a week, he had $100,000 week because he had moved into a straight liquid, you know, short-term bond cash type position that didn't move an inch. as the market, as the S&P was down 10%, he didn't really feel like he did, you know, he wasn't happy. And for me, I'm thinking, this dude just killed it. And he wasn't happy. And so I think that people got to wrap their heads around that because that guy just killed the stock market, absolutely murdered it. He could just be completely flat with the S&P for the rest of the year. And if he takes that 10% gain, he just killed it. You know, professional investors, if they can beat the market by 2%,

Starting point is 00:29:49 they are a master at their craft. So I think people really need to have a lot of respect for that idea. Protecting your downside risk. And just because it doesn't go up, that is a win, folks, if everything else goes down. I'm so happy you said that, Preston, because I was just looking at my stocks and I was thinking, oh, steak, they just dropped so much. But then, first of all, I thought, wow, that means I can buy more. And the second thing was that, well, luckily, I'm 70% plus in cash.

Starting point is 00:30:16 Like, when I say I'm heavily exposed to oil, that is in those 30%. And you kind of, it's like, it's all relative, right? So if you have 20% in oil and you have 30% in equities, you feel you're heavily exposed in oil. But you might also have like 99% of your whole portfolio in oil. And that's really when you feel like you're crushed. Like, I feel like I've been making a fortune as president and saying, but a fortune in terms of I've been losing less than otherwise would if I was really invested in equities. That's exactly right.

Starting point is 00:30:44 So that's the key point now, which people don't understand. And I'll tell you, West Gray does a great job of talking this, Dr. Wesley Gray, who we had on the show a few episodes back. It's all about asset allocation. This is what Tony Robbins talked about in his book whenever he interviewed all these different people. You can't time the market. You might think that that's what we're talking about a lot of times. We're not talking about that at all. What we're talking about is the asset allocation. As things became more riskier in the markets, I moved more and more and more into a cash position. I'll tell you, for the last year, I've been really, really struggling because I've had to be patient. I've had to sit on my hands for a long period of time, just really not doing too much because I knew there was a lot of risk in the market. And I adjusted my allocation of what it is that I own based on that risk profile.

Starting point is 00:31:35 So whenever I was looking at stocks, to me, they seemed extremely risky because of the downside risk. So I start moving out of it. I don't have a large position. I'll tell you, you go back three or four years ago, I was like 100% in stocks. Okay, not today, not even close. So I brought down this book, and one of the people on Twitter hit me up and said, Hey, did you read Ray Dalio's economic principles? And I was like, yes.

Starting point is 00:32:01 Not only did I read it, but I love it. And I wanted to just talk about this just a little bit and maybe read through one section of this book. And sorry, Stig, if I'm going off on a tangent here, but this is something that I really wanted to talk about because I think it definitely relates back to a lot of the discussions that we've been having with currencies and commodities. And I also wanted to just highlight to people how important this book that I'm about to talk to you about is. So Ray Dalio, everyone knows we've talked about the video that Ray Dalio made talking about credit cycles and, you know, basically how he sees the economy working like a machine. But a lot of people don't realize is that Ray Dalio has

Starting point is 00:32:43 about a 300-page PDF online for free called Economic Principles. And what it is is he has basically the first 25 pages of the book talk about a textual form where he's written out his ideas of how the economic machine works.

Starting point is 00:33:02 You'll see some things in there that you don't necessarily see in the video. It's well worth your time. He then goes through a deep analysis, a hundred-page analysis of debt cycles. Leveragings and de-leveraging short-term cycles, long-term cycles, and he uses real-world events that have happened over the last hundred years. Then he gets into this third section, which is another 150 pages where he talks about

Starting point is 00:33:24 productivity and structural reform and where he's basically investing his money and where. I treasure this guide. This thing is like one of my most prize possessions. I keep it on my bookshelf. I went out and took the PDF and I got it printed, one copy for myself, and I had it bound it like the local kinkos, I would highly recommend everyone in our audience. We'll have a link to this free PDF. You don't have to buy anything. You can download this PDF. We'll have a link on our site. One of the things that Dahlia talks about in this guide that I just found insanely useful for me to understand how currencies work and how commodities work. And we talked about this a little bit in the show. So this is one of the reasons I want to read this section. This is a little bit

Starting point is 00:34:09 of, this will probably take me about five minutes to read this, but I think that this is something that's very useful and it's something that I think about often as I'm thinking about how currencies work and how commodities work. So here it goes. I'm going to read this. And this is from Ray Dalio, billionaire net worth about $16 billion, the guy that wrote this. Since the value of money has fallen over time relative to the value of just about everything else, we could tie the currency to just about anything in order to show how this monetary system would have worked. For example, since a one pound loaf of white bread in 1946 cost 10 cents, let's imagine we tied the dollar to the bread.

Starting point is 00:34:46 In other words, let's imagine a monetary system in which the government in 1946 committed to buy bread at 10 cents a pound and stuck to that until now. Today, a pound loaf of white bread cost $2.75. Of course, if they had used this monetary system, the price would have risen to $2.75 because we all would have bought other bread from the government at 10 cents instead of from the free market until the government ran out of bread. But for our example, let's say that the price of bread is $2.75. I'd certainly be willing to take all of my money, buy bread from the government at $10

Starting point is 00:35:22 and sell it in the market at $2.75 and others would do the same. This process would reduce the amount of money in circulation, which would then reduce the prices of all goods and services, and it would increase the amount of bread in circulation, thus lowering its price more rapidly than other prices. In fact, if the supply and demand for bread were not greatly influenced by its convertibility to currency, this tie would have dramatically slowed the last 50 years rapid growth in currency and credit. So obviously, what the currency is convertible into has an enormous impact on this process. For example, if instead of tying the dollar to bread, we chose to tie to eggs since the price of a dozen eggs in 1946 was 70 cents instead

Starting point is 00:36:05 of 10 cents. And today, it's $2 for the price of eggs. Currency and credit growth would have been less restricted. So what he talks about here, ideally, if one has a commodity-based currency system, one wants to tie the currency to something that is not subject to great price swings in supply and demand. For example, if the currency were tied to bread, bakeries would in effect have the power to produce money leading to increased inflation. Gold, and to a much lesser extent, silver have historically proven more stable than most other currency backings, although they are by no means perfect. In the second type of monetary system, in a fiat system in which the amount of money is not

Starting point is 00:36:47 construed by the ability to exchange it for a commodity, the growth of money and credit is very much subject to the influence of the central bank and the willingness of borrowers and lenders to create credit. So this is such a profound idea where you're talking about when you back a Fiat currency to a commodity that can't be manipulated or adjusted in its supply, you're going to have a much tighter credit cycles aren't going to be nearly as pronounced. And as you step away from that and you get into something that the price that it's tied to is very volatile or nothing at all, you see these credit cycles that go into these big swings. And what you can see in this as well is you can see how currencies and commodities are tied at the hip. But it's almost like they're tethered together because something always has to be related back to something else in order to talk about price. So that's just a little glimpse of some of the stuff that's in this book that billionaire Ray Dalio has written.

Starting point is 00:37:42 So I know that was a little bit long. I'm sorry to just keep on reading and droning on Stig. He's yawning right now. No, I'm not. I like your point impressed. All right. So we said that we were going to talk about this book, and it's probably going to be one of our shortest book summaries ever.

Starting point is 00:37:59 We're talking about Michael Lewis's boomerang book for anybody. If you don't want to read this book, which is what I recommend, don't read this book. I didn't really like this book. Stig, did you like this book? No, I really didn't like. I actually considered shooting an email saying, let's not do this book. And then I came up with this idea, hmm, could we just do something with a current mild conditions and then still say that we kind of did the book, and that's what we did, I guess.

Starting point is 00:38:24 Yeah, that's exactly what we did. I almost sent the same email, but here we are. We did complete the book. I was not impressed. And, you know, to be honest with you, Michael Lewis, probably one of my favorite writers, it was kind of a weird book. He goes around the world. Michael Lewis travels around the world, and he looks at all these different economies. Like he starts off in Iceland, then he goes to a different location, and he basically talks about a lot of the issues that have unfolded in some of these countries. And there's a lot of interesting points. I'm not going to lie, there's some interesting points, but in totality, I didn't really

Starting point is 00:38:57 get the gist of the book. Like, what was it, what was the big main theme of the book? And I just didn't really capture that. And I think that's probably more of my frustration than anything else. It's like, there just really wasn't a point to the book other than just talking about different locations that he went to and the trials and tribulations and the corruption of different governments and how they didn't know what they were. doing, investing in certain markets, and how eventually the country paid for their lack of

Starting point is 00:39:26 understanding of what they had invested in and what they had done over a long period of time and devaluing their buying power within the country and things like that. So I'm going to throw it over to Stig. He has some main points from the book. Yeah. So I think what President is saying is that Michael Lewis just travels around the world and he starts in Iceland. And I think the key takeaway I had from his story in Iceland is, how basically you can manipulate asset prices. And I guess that's basically what the financial crisis was all about, but I think he had a very interesting anecdote to that.

Starting point is 00:39:58 So just to give you a point of reference, so from 2003 to 2007, the stock market was up nine times in Iceland. For comparison in the States, it doubled, which is still a lot, but just think about it nine times. That's crazy. And one of the reasons, and this is basically just assets, and it doesn't have to be stocks, specifically this was property. So basically one of the things that went wrong on Iceland was the way that they were handling the

Starting point is 00:40:22 asset and how it was inflated. So say that I own, say, a property and Preston wants to buy that from me. Say the price is $1 million. So he would borrow $1 million from the bank and then buy the assets from me. Then what would I do? I would like that asset back, for instance, and Preston would say to me, it's now it costs $1.5 million. So I would go into the bank and borrow up to $1.1.5.

Starting point is 00:40:47 1.5 million and then buy it back from Preston. Now, it was a bit more advanced than this. It was not just two people because that would be too obvious, but they have like a whole circle of people doing this. So they were passing around assets and then borrowing it to the inflated value and then spending that money. And I think that was one of the things that was really disgusted me about the whole story about Iceland. If that is really what has happened, I guess I was not too surprised of what did happen up there. So that was definitely one of of those scary stories that hopefully shouldn't be repeated. For the second point, then he went to Greece. And I think Michael Lewis's whole story about Greece was kind of strange. Like, I was kind of

Starting point is 00:41:31 waking up thinking, did I really listen to an hour about some monks in Greece? Like, did you get the same impression, press? Well, to be honest with you, this is maybe one of the parts in the book that I liked. Oh, really? Yeah, I like the Greece part. I think it was an interesting story. Now, I didn't think that it really added much value to my understanding of markets or anything like that. But it was kind of a neat story. It just didn't apply to anything. You know what I mean? So I liked it, but I didn't like how it fit into the broader context of the book. Yeah. Well, I think my Greece story is that Greece is such a weird country, and especially the way that they manipulate the numbers, even, you know, from the states. So if you're thinking, how could Greece ever adapt to the euro? Because there is a lot of

Starting point is 00:42:15 rules and regulations they have to follow. And for instance, one of them is that they cannot have more than 3% deficit to GDP. So what did the Greek government do? They just moved expenses like pension and defense. They just erased that off the books. They cooked the books. And this is actually my favorite story because there was also rules in terms of inflation. And apparently there was a lot of inflation in Greece back then whenever they were adopting the euro. So one of the guys, his job was to figure out how we can get less inflation. And what he did was that the way that you measure inflation that you have a basket of goods.

Starting point is 00:42:52 And apparently, back then in Greece, tomatoes was very expensive. So what he did was he removed tomatoes from their inflation index because there was very expensive good. And suddenly they have lower inflation. I was like, oh my God, it's like magic. The inflation goes down when you take the tomatoes out. Yeah. I don't know.

Starting point is 00:43:15 Do you have anything to Greece or do you want to go to Ireland? Well, there was a little bit of an interesting discussion with the monks and buying up all this real estate. I enjoyed the Greece portion of the book. I thought that it was really interesting. And the talking about how they had cooked the books and how they got into the year, I think that that was a really interesting discussion. It doesn't really fit into a broader theme of the book. But that's my only comments, Dick.

Starting point is 00:43:37 Yeah, I think I definitely didn't like too much. Oh, sorry, Michael Lewis. I love your books. And this is just so negative. But I definitely didn't like the island part. I think what Michael Lewis does really well is that he has this interesting anecdotes that can really build up a story and really build up characters. He's a great storyteller. That's the one thing I will say.

Starting point is 00:43:57 That's what Michael Lewis does really well. This guy will set up a story. And I think that's why so many of his books have been turned into motion pictures is because he's a great storyteller. So you will get that in the book. But this one was really lacking as far as the structure and just the layout. and it was kind of a mess. You could tell you'd probably put this one together pretty fast. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:47:39 Yeah, I think the one thing I did like about his story about Ireland is his discussion about when is a bank systematically important. And I think we have this discussion in Europe. You definitely have that discussion in the States, like, when is the bank too big to fail? And one of the problems that they have in Ireland was that they have this Anglo-Iro-Iro. bank. It was a very small bank, six branches, no ATMs. And basically what they did was they were borrowing money from foreigners. And then they were lending it out to people that wants to develop land and develop real estate. And one way or the other, they convinced the government that it was

Starting point is 00:48:20 systematically important for Ireland. So when all this turned south, obviously it did whenever the bubble burst. Like all Irish citizens had to pay for this. And I think that was probably one of the lessons from the financial crisis that when should the government go in and guarantee basically anything. I think that was my main takeaway from this chapter. Kind of an interesting point to piggyback on that stick where you're talking about the citizens have in the pay for it. Right now over in Saudi Arabia, just to kind of tie it to a real world example what he's talking about. Over in Saudi Arabia, what they're doing because, you know, believe it or not, even though they're the lowest cost producer with all this oil

Starting point is 00:48:59 stuff, they might be the first person to break, which I just think talks tremendously about the efficiency of the operations that they have over there. And I guess how much money is being sucked out at the highest level within some of these companies that are being run over in Saudi Arabia. But what they've done is they've actually increased the price of their gas and a lot of their other commodities by almost like 40 percent in order to try to offset the ever-growing deficit, or not deficit, because they were in a surplus, but they're chewing away that surplus at such a rapid pace that they're going to be taking on a deficit. And in order to try to combat that, they're now pushing those prices and everything off to the citizens in order

Starting point is 00:49:43 to protect the public debt from expanding over in Saudi Arabia. So that's a real world example of what's happening right now. Yeah, and I think Tebow and Pagan said, and this is the same interview as the president was referring to before, he's saying it right now with the oil price it costs the Saudis $500 million. a day. So it's very, very costly what you're seeing at the moment. And as you can see, we didn't really want to talk about this book. We just want to talk about current events. Yeah, we just want to talk about oil, as always. I have one final point about the book, and I just want to say that because it was hilarious. That was about Germany. And so this is really a story about how complex and

Starting point is 00:50:19 economic system can be and how intransparent it is to everyone looking in. So if people are not familiar with this. And we have something called the EU Rescue Fund, which is, has really been saving a lot of countries like Ireland and right now is saving Greece, or we think Israel is saving Greece from all the troubles after here in the finance a crisis. Big, big think. Yeah, yes. So this is what Michael Lewis is saying in one of his chapters here in the book. He's saying that what's happening is that Germany gives money to the EU Rescue Fund. And then the Rescue Fund gives money to the Irish government, which in turn gives them to the Irish banks. Now, so you can guess what does the Ayric banks do with all the money now?

Starting point is 00:51:01 Well, they use them to pay off their loans to the German banks. So suddenly, you just have a circle here, and money is just fluctuating around in Europe, so everyone can say that no one is defaulting, but the money is really just going round and round. The biggest concern with the euro is Germany. Because once the Germans have enough, and they're going to stop basically bailing everybody out, that's when you're going to see major issues with the euro. It's going to be interesting to see how it all plays out. I think Germany's getting to a breaking point with some of this stuff.

Starting point is 00:51:33 Yeah, I think, wow, that was really short precedent. And we even had a chance to talk about Saudi Arabia and oil in the meantime. That was basically all that had for the book, and it was like, it wasn't that short, was it, like, at least a few hundred pages. At the very end of the book there, there was a discussion with Arnold Schwarzenegger and state bonds in the United States, which was a really interesting discussion. I kind of like some of that just because he was talking about Arnold and just the way he was describing him was kind of neat. I don't know if any Arnold Schwarzenegger fans out there, but if you are, it's definitely worth your time to read his description of Arnold and the discussion on state bonds and how states like California are just, wow, you talk about a lot of friction in the system. So that was kind of a neat discussion as well. But here's the thing, folks, if you don't want to buy this book, which is what we recommend, do not buy this book.

Starting point is 00:52:22 Go out and download our executive summary of the book. You can kind of scan through that. We hit the high points of every chapter. The summary is about five pages long. So if you go through our summary, you're going to be able to really capture the key points of the book. And if it's something that does interest you, then go out and read it. But I think for this one, just read our summary on this and see what you think. And I'd call it quits and move on to the next book.

Starting point is 00:52:44 Anyway, if you want to get our summaries, this summary, any book we read a book about every two weeks. We send that out to our community. you sign up on our email list at the Investorspodcast.com. It's completely free. So you can sign up on that. If you don't like it, you can unsubscribe at any point in time. It's not going to hurt our feelings. We really do do it for the audience. So great to have people on that list. The last thing that I want to talk about real fast is we are going to Berkshire Hathaway shareholder meeting at the last week of April of 2016. We sent out a message to our email subscribers with our last executive summary with a link that people could use to sign up. go to the Berkshire meeting and hang out with us. Stig and I will be at the meeting.

Starting point is 00:53:24 A lot of the people that we've had on the podcast are going to be at the meeting. I'm assuming Guy Speer will be there. Jillian, who interviewed Warren Buffett, she'll be out there. There'll be tons of people that are going to be there. And what we're going to try to do is we're going to try to bring a lot of these guests to come over and meet our community. Right now we have, I want to say, like, 160 people that signed up in the first week. So it's going to be a big audience, a big community from the investment.

Starting point is 00:53:50 podcast out there. We cannot wait to interact with you guys. A lot of the emails that I've been getting from people about this event, they're saying, well, you know, I'm not really that much of a hardcore investor. I'm just learning right now. I'm getting my feet wet. I've only been doing it for a year. Is this something that I, you know, is appropriate for me to go? And the answer is yes, yes, it is definitely appropriate for you to go. In fact, you're probably going to be some of the people that we enjoy talking with the most. So please, please, please, If you're in that local area or you want to fly out for just like a little mini vacation and just see something really neat to see Warren Buffett on the stage with Charlie Munger and Bill Gates and all those guys come out for this event. It's really going to be a great time. And the thing that I took away from the last shareholders meeting more than anything was the people that I got to meet. You're going to meet some of the most interesting people with these things.

Starting point is 00:54:40 Yeah, last time we met Harry, right? And now he's part of a mastermind group. So, like, those are some of the people that you'll get to connect with and you'll get to connect with people. from our community and, you know, some of the bonds that we, that we had from that meeting are just so strong with some of the people that attended last time. So, highly recommend that if you guys have the extra cash to pay for the ticket to get out there and to pay for the hotel. That's pretty much all it takes. One other thing I want to clear up with the meeting. In order to get credentials for the Berkshire meeting, you only have to have a B share. You do not have to own an A share, which is like $200,000. So you don't have to own an A share. You can actually own a B share and still

Starting point is 00:55:17 attend the event. So a B share is like $129, I want to say right now. So you can buy one B share and then you can apply for your credentials to attend the meeting. So just realize that. It's a lot easier to go than you might think. So one of the most useful tools that we have that Stig and I use is audibles.com. We use audibles because we can listen to all these books when we're traveling on the road. And I've got four kids. I don't know if I've ever really talked about that too much on the show, but it's like a circus at my house, and it's very hard to read books. So a lot of the times when I'm in the car and on a 30-minute commute or whatever, I'm able to do two things at one time.

Starting point is 00:55:57 I can drive in the car and I can read a book. And there's many of other opportunities that you might have. You might be cutting your yard or you might be washing dishes or whatever. You can do two things at once when you do audibles. And this has been a huge part of our ability to plow through so many books and to be able to learn and just share a lot of this information. So if you go to our website and you use any of the links for our audibles, you can get your first download completely for free.

Starting point is 00:56:23 Some of these books are like $30 to $40. So if you pick one of those books, it's like a $3.30 to $40 gift from Stig and I to download your very first audible book. So we highly recommend that you guys use that link. So that's all we have for this week on the show. We thoroughly enjoyed talking some of this current market conditions. we'll continue to watch what's happening in the market, provide you guys information through our emails, through our podcasts, through our tweets and Facebook posts and all that stuff to help

Starting point is 00:56:50 keep you educated on some of the things and some of the important variables that we're looking at as the market conditions continue to change. We just really want to thank our audience for joining us this week and we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the investors podcast by going to 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

Starting point is 00:57:31 written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 068 : Current Market Conditions and Michael Lewis' Boomerang

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