We Study Billionaires - The Investor’s Podcast Network - TIP157: Quantitative Tightening, Bitcoin, and Currencies w/ Grant Williams (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. So back in 2008, we experienced a massive financial crash in the global economy. In an effort to prevent a total economic meltdown, the United States government approved the bailout of numerous banks and key structural businesses to keep the economy afloat. During this time, the U.S. Federal Reserve implemented an idea called quantitative easing. And quantitative easing became so popular that other central banks around the world also joined in on this technique, and it became a sought-after. tool to fix a sinking stock market. So fast forward to today, and we still have some organizations

Starting point is 00:00:35 like the European Central Bank that are using quantitative easing, even though they've seen a massive jump in their stock market. In some economies, we've seen it go up 100, and others we've seen it go up 300% from where the 2008 stock market crash occurred. On the other hand, central banks like the U.S. Federal Reserve are actually talking about the idea of undoing some of the quantitative easing efforts today in 2017. So on today's show, we found one of the smartest macro thinkers we could find to talk to you about quantitative easing. And that's Mr. Grant Williams. Grant works at Real Vision TV. He goes around and he interviews some of the smartest macro thinkers on the planet that manage billion dollar portfolios. And he does this pretty much on a daily basis.

Starting point is 00:01:21 So whenever you hear this interview, I think you're going to be really impressed with how smart grant is. We've had them on the show before, and every time we bring them on, we get such great feedback from our audience. So in this episode, you'll learn what quantity of easing is and how it works. But perhaps more importantly, what will happen to the economy if the Fed decides to unwind the $4 trillion balance sheet that they accumulated over the past decade. So if you're ready, let's go ahead and do this. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Starting point is 00:02:11 Hey, how's everyone doing out there? Great to have you guys with us. I'm accompanied by Grant Williams, and we are so pumped to have you back on the show here, Grant. Thank you so much for taking time out of your date to chat with us. Oh, Kristen, I'm flattered, to be honest. Thanks for having me. So, Grant, I want to jump right into this.

Starting point is 00:02:27 And, you know, what we're trying to accomplish with this episode is really kind of talking about quantitative easing in general, and then really talking about the path for because now we got the Fed and some other banks, not the ECB, but we got some other banks that are saying that they're going to try to start unwinding some of this stuff. So let's talk about quantitative easing upfront. For a person listening to the show, they probably hear us talk about quantitative easing from time to time, but maybe don't really understand the mechanics of what's happening. And it's really quite simple, but I want you to explain in layman's terms so anybody can understand this. What's happening when a central bank executes this quantitative easing?

Starting point is 00:03:04 Sure. Well, you're absolutely right. It is very, very simple. Simply put, the Fed just adds credit to the reserve accounts that the bank's hold with them. When in return, they buy treasuries and mortgage-backed securities. I mean, in a nutshell, it's that simple. But what it's designed to do that the next order affects, buying those treasuries, the Fed is trying to lower rates and keep them low, and that in turn is supposed to encourage people to borrow, which is meant to stimulate the economy. And then in this perfect world, once the economy has successfully been stimulated by this very simple scheme of theirs, then they simply sell the bonds that they bought back to the market, lower their balance sheets again, and there's no adverse side effects,

Starting point is 00:03:44 either on the way and all the way out. So then that's pretty simple, right? I mean, all could possibly go wrong. I mean, look, I guess the best way to get a sense of how far detached we are from that very simple idea, if you think back to what's happened with quantitative easing, and I'll just pick the Fed. I mean, the Japanese are on QE 19 at this point, and perhaps we can talk about those a little bit later. But the very first, I guess, piece of QE, if you like, was the TARP program. If you remember right, the crux of Lehman's, they threw $800 billion at the market to buy assets. So that was effectively the first instance of QE at the Fed try. At the point in time, it's worth remembering that their balance sheet was somewhere between $700 and $800 billion.

Starting point is 00:04:23 So they basically doubled their balance sheet overnight. And after that, they bought just over a trillion dollars of mortgage-backed securities, I think $300,350 billion of treasuries and a couple hundred billion dollars of agencies. And that was all by 2010. And generally, they were buying those from the banks to shore up the bank's balance sheets. You know, you get to, I guess, June 2010, and the economy was growing again. So that enabled them to say that we're going to stop this now and start winding back our balance sheet. Well, guess what? Two months later, literally two months later, the economy kind of started showing signs of weakness. So, So they jumped in with another $30 billion a month of bond purchases, again, to do that same

Starting point is 00:05:03 thing, lower rates, encourage borrowing, stimulate the economy. So then you get to, I guess, QE2, which would have been November 2010. That ran through to the middle of 2011. They bought about $600 billion more of bonds there. Then because people were getting kind of bored with QE and it was starting to have less effect, they started Operation Twist, which is essentially by more mortgage-backed securities because those were the problems on the bank's balance sheet and extend the duration. So, i.e. let their shorter duration bonds they bought run off and replace them with longer

Starting point is 00:05:36 durations to try and lower borrowing costs further out the curve. And then that didn't work. And by January 13, we had QE3, which a lot of people call QE Infinity, which is essentially, we'll buy $85 billion a month indefinitely. So you can see if you go through that time, you see how this program escalated, and that's due to it not really having the effect that they wanted. And not only that, but getting in so far that you become a backstop to the market. So as soon as the market falters, everybody's eyes turn to you to do something. And what you've programmed them to expect you to do is buy assets. So that's what they've done.

Starting point is 00:06:11 And the most amazing step I read recently was that now 0.2% of the banks control 70% of the assets in the US. So that concentration by trying to bail out the banks has had just, I think, a disastrous effect. And in doing this, in following the QE program, and trying to create inflation, what they've instead done is created asset bubbles and asset bubbles everywhere. So that's kind of, it's a long answer to a short question, which I apologize for, but that's just to give people a sense of the progression, which I think is important to understand. No, that's fabulous. So correct me if I'm wrong, but the way I'm thinking through kind of the mechanics of this

Starting point is 00:06:49 is you got all these assets. We're going back to 2008, 2008, 2009. You got all these assets. And the money's not, you're not getting any type of velocity with any type of cash flow at this point. Everything's kind of seizing up. It's almost like an engine

Starting point is 00:07:02 that's kind of run out of oil and it's starting to seize up at that point. And so the way I understand it is the Fed is basically saying, hey, all these securities, specifically fixed income securities, the bonds on the market, we're going to take a bunch of cash

Starting point is 00:07:17 and we're going to buy that from whoever it is out there on the market. So that way we can swap these bonds with cash. That way there's tons of cash in the economy for people to spend. And then you don't have this engine seizing up kind of scenario anymore. And like you described on all the different phases of this, they're pumping cash into the system. Let's see what happens and doubled their balance sheet on the first go around. And that wasn't even close to enough.

Starting point is 00:07:44 And again, all they're doing is they're just buying those securities off, the market, the Fed is, they're buying these bonds off the market and they're just doing a cash infusion into the economy. Another cash infusion. So all these dollars that can be spent immediately are now being pumped into the economy. And now we're at the point where the Fed's saying that they're going to undo that. So now we're going to have the exact opposite occur potentially. I mean, they say these things and then nothing happens for years. But effectively it'd be the exact opposite, right? So we would then be taking the cash that's currently existing in the system, and we'd be putting these securities back on the market. And now all of a sudden you don't

Starting point is 00:08:25 have a buyer at any price like we've seen over the last decade. Yeah, that's exactly right. It's exactly right. And it's amazing to me that if you just take a step back and you look at what QE was designed to do. So first of it was designed to stabilize the economy. And fair play, the top, I guess the top bill did. The stock market bottomed in March of 2009. It's been a very weak recovery. It's certainly not the kind of recovery you would expect to get for $4.5 trillion of stimulus, but the economy is recovered. But all the way through that, we've seen the unintended consequences in Vancouver house prices, Toronto house prices, you know, this equity market being at levels and valuations like which we've never seen, and companies borrowing billions of dollars

Starting point is 00:09:08 to buy back stock because it's cheap to borrow the money, but they're not really feeling like the economy is something they can invest, put capital investment into. So they'd rather buy the shares back and try and produce a return for their shareholders that way. What staggers me is the idea amongst the central bankers that having seen the unintended consequences, but perhaps refusing to acknowledge them, they seem to believe that we can reverse this process and have no unintended consequences the other way. I see it the same way.

Starting point is 00:09:39 So they've raised the federal funds rate, which is the borrowing cost. for tomorrow. It's not this long-term borrowing cost on the 30-year, anything like that. They've been just adjusting the federal funds rate on the short end of the bond yield curve. And it really hasn't had, I was expecting a lot more pullback in the market by them doing that. But you know what? The market has just been screaming since they've done a couple rate rises. Now, they haven't raised it a lot, but they've raised it a little bit, which is tightening that money supply. And it's not the same as going and reversing QE, which is what they're talking about by basically selling off their balance sheet. But it is having a contraction or a credit tightening event by them raising that

Starting point is 00:10:20 federal funds rate. Do you see when we get into them potentially unwinding the balance sheet that it's just a completely different ballgame than what they've been doing with adjusting the federal funds rate? Yeah, I think it has to be. Interesting enough, people kind of don't tie the two together. But when they first raise rates back in December of, I guess, 2004, 15. If you remember, January and February, market fell out of bed. We had the biggest correction we've had for several years. And people kind of don't tend to put the two together. I don't think it's any coincidence that the market had two very, very weak months immediately after that first rate hike. There was a kind of a delay, but it was, you know, it was over Christmas.

Starting point is 00:11:01 It was, the markets were quiet. When people came back in January, the market spent two months falling. And what did the central banks do? They stepped in with all kinds of assurances. They were jawboning themselves crazy. And I think that that strong reaction from them, that almost desperate reaction to try and stop this, is what perhaps has allowed them to gently raise rates subsequently because the markets now once again think, okay, well, if the markets fall, they've got our backs. You know, I don't think it's possible. Well, they've proven it's impossible to expand a balance sheet by, you know, $4 trillion without creating problems to deal with another day. So it stands to reason that by trying to do it the other way, you either

Starting point is 00:11:44 unwind the problems you've created, which means a massive fall in asset prices, or you create a wholly new set of problems. But there is no way to do this with no pain. And the idea that if you do it slowly, it'll all be okay is laughable. I mean, it really is laughable. So, you know, there is going to be some pain that the market is going to try and inflict upon them. The only question to me is how strong is there as old. And I think Stanley Fisher resigning this week out of the blue is a sign. You know, somebody said to me, who shall remain nameless, but they said that the day they heard that Alan Greenspan had stepped down, because you remember they kept him on because apparently they couldn't find his replacement, even though it turned out was the guy sitting in a chair next to him.

Starting point is 00:12:30 But he stayed on for a little while after his term ended, and a friend of mine said, the day I heard that he'd step down a hundred days shy of becoming the longest ever serving Fed chair, I put my house on the market because I knew the only reason he would step down that shy was he didn't want to be there when something he saw bad happened. So, you know, it's little signs like this. And I just, you know, forget all the finance aspect of it. If you think on a real world basis, what these guys are trying to do, the sheer impossibility of it is almost I'm overwhelmed to me. Yeah. No, I agree. And it's funny you said the thing about Stanley Fisher, because I thought the exact same thing when I saw he was resigning out of nowhere for personal

Starting point is 00:13:11 reasons. They don't really say anything else. And like, I wasn't expecting him stepping down at all. And it's like, why is he leaving? What's the real story here? And I mean, he's the number two guy at the Fed. And, you know, I hate to imply anything because we both just don't know. We have no idea the reason why. but it is, I think, a little strange to see somebody of such, you know, a prominent position be stepping down right now, especially as they're starting to talk about unwinding the balance sheet here in September. Yeah, guys, and really to add something to the discussion here, a lot of people don't realize what's happening in Europe.

Starting point is 00:13:46 The European Central Bank has been conducting QE on a massive scale for a long time, and they're still doing it. Yeah, I mean, significant amounts of quantity raising, and they've just kept their purchases steady at $60 billion this month. So this is the interesting, if you take an aggregate graph of the Big Five Central Bank, the Bank of England,

Starting point is 00:14:07 the Fed, Bank of China, and the ECB, you go back to when the Fed stopped QE, the line just keeps going up because the baton gets passed to first the Chinese, the Bank of Spain are always in there, and latterly, the ECB, there needs to be some form of stimulus being pumped into the market's liquidity,

Starting point is 00:14:26 whatever you want to call it, from some angle at every point in time to keep this thing together. So we haven't yet seen what happens when you have opposing forces. We haven't seen the ECB supply liquidity and the US draining. We haven't seen that yet. And I suspect that as powerful as the ECB tailwind has been for markets, the Fed is just, it's a bigger dog in the pound. And I think if the Fed do get serious about reducing their out,

Starting point is 00:14:54 but they're battened banishy, which I personally, I don't think it's a chance in hell I can do it. But if they get serious about trying, then whichever way you look at it, those two counteracting forces are going to produce some turbulence. And that's never good for markets. I just, you know, based on what I've seen from the Fed in the last couple years, it seems like it's more about the signaling. Much more about the signaling. Hey, if we talk about this, people are going to start pricing that in as far as this balance sheet on wine. but I think that at the end of the day, no one actually believes this. I don't believe it. I don't think that they're going to actually unwind their balance sheet at all. The market's performance

Starting point is 00:15:31 would suggest that the market certainly doesn't believe. And here we are. They're in this crazy situation where they've now got to try and convince the market they're serious because the asset bubbles are getting out of control now. And how do you talk down an asset bubble if the people blowing it are absolutely convinced? It's a very, very difficult maneuver for them to pull off. And personally, I just don't see how they can do it. Well, that's interesting that you say that. So if I was sitting on the Fed board and I would hear what you just said, which is, hey, we've got to actually do something. We just can't talk about it because then no one believes anything.

Starting point is 00:16:05 My counter to that, knowing how just atomic this thing is that they've built up here and how energized this thing is, I would start to unwind it, but I would do it. It's such an infinitesimal size that it's just pretty much meaningless. It's more a ceremonial kind of thing that I'm reducing the balance sheet. But in practicality, when you'd look at the numbers, it'd be so minuscule that it would have no impact. Would you agree with that approach? Is that what we're going to see out of them? I mean, the only problem that I see with that is it's just perception. There's a point where the market starts to extend it forward judgments about what's going to happen.

Starting point is 00:16:42 And so at some point, maybe they get lucky and the markets go, okay, this is going to dribble the way. they're going to sell like $28 worth of bonds every week forever. Okay, fine. But that doesn't really imbue them with much credibility. But if at some point the market says, you know what, they're serious about this, that $4.5 trillion is going back to $2 trillion. Then the markets have to do what markets do. And they discount, okay, what does that world look like?

Starting point is 00:17:07 And how far away is it? And can we afford to just play along? And the chances are maybe they can't afford to play along. The one thing that confounds all of this, of course, is if we end up with a recession coming in the middle of this. And if they are going to do this very gently, then there is absolutely zero chance that they won't be a recession at some point along that path. And so what happens when the recession comes along? They're going to have to lower rates, which is 1%. They have to play with right now. So we know what's going to happen. They are going to have to step in once again and either buy more bonds or I suspect next time, buy equities or both. The Japanese have shown us the way. The Japanese did QE and bought a significant portion of their bond market over many years. So that's where we're heading.

Starting point is 00:17:57 Anyone that doesn't look at Japan and importantly look at the steps the Bank of Japan has taken and think, okay, that's my benchmark for what's likely to happen, isn't paying attention. At some point, if we get a recession, I suspect the Fed are going to have to step in and buy equities. 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 Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world.

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Starting point is 00:22:15 That's Shopify.com slash WSB. All right. Back to the show. Yeah. And I think Warren Buffett and Charlie Munger agree with your grand. And it's really interesting because they always ask these questions about macro and they always talk about how they refuse to talk about it, how they can't predict the future.

Starting point is 00:22:36 but if you really are reading into the tea leaves here, I think it's evident that they see the US going down the same path as Japan. You know who's done some fantastic work on this is Mark Usko, and Mark's put some great chance out that show all kinds of different metrics that show that the US is basically 12 years behind Japan. If you overlay the US and Japan, whether it's debt to GDP, whether it's a balance sheet, whether it's equity markets, lag it by 12 years, and you get very, very good matchups.

Starting point is 00:23:06 And it makes sense. I mean, it really does make sense. And that's kind of worrying. Yeah. And so we all know how that story ends, which is the market will be down by 75% into the coming decades. I mean, that's what it played out in Japan. Now, I know there's probably people that are listening to this that would say, well,

Starting point is 00:23:22 that's never going to happen here in the U.S. And I would tell you, read up on Japan and try to understand what's going on because that might be a real possibility simply because there's no juice left for the Fed. The Fed's running out of all their ammunition. They can only buy so much of this before they pay interest rates at zero percent and things then start playing out in a different manner. And that's really what we've got going on. You know, the thing that I think a lot of people lose sight of with quantitative easing

Starting point is 00:23:50 is it's almost like you've got this person that will buy at any price. I mean, that's effectively what it is. It almost be like having, you know, you've got your lemonade stand. And mom and dad come by to buy your lemonade because they're the only people that are going to buy it in the neighborhood. And they're going to pay any price. So as the kid, you could say, hey, I want $10 for this cup of lemonade. Mom and dad are like, yeah, sure. They come back, you know, an hour later. And you're like, hey, I want $50 for them. And they're like, sure, here's $50. And so, like, reality is just completely thrown out the window on this stuff.

Starting point is 00:24:21 When you have a buyer that will literally buy at any price. And that's what you see with quantitative easing. The government will buy at literally any price. As a father who's bought his fair share of $10 cups of lemonade, that he is, it's a great. That's exactly what happens. It's about conditioning. And if you are conditioned that there is a buyer in a particular market, if you're a poker table and there's a guy who can just pull his own chips out of thin air, what are you going to do, right? The pots are going to get bigger and bigger and bigger. And that's what's happened with the market. There's a guy at the table who can print poker chips. And so this is what's happening. They print the cash out of thin air. And there's no point to really get into semantics about are they genuinely printing money or not. They are creating bank, bank, balance sheets out of thin air and swapping that cash for bonds. And they will do that, to your point, at any price when they commit to saying, we are going to spend this much a month, well, that's just happy days for the banks. I mean, they know there's $85 billion in the case of the Fed during QE3 every month, a bid. The ECB are now good for $60 billion a month. It's a great way to make money.

Starting point is 00:25:26 It's a really great way to make money. But at the end of the day, bonds are an asset and liability. They're not just a number that disappears once the trade gets made. All these, you're a great way to make. all these assets and liabilities are sitting on balance sheets and they are doing to those balance sheets what you would expect them to do. They are weaking them in many ways. I was going to get into this subject a little bit later in the discussion, but I think it's more appropriate because of the discussion we just had. And, you know, in my mind, I'm trying to understand how this can all end and how this can all play out in a civil manner. That's how, you know, maybe it's the optimist in me trying to understand how this can actually play out in a civil manner. And the only thing that I can wrap my head around is that you have to have some type of global pegged currency in order for this to all play out in a manner that forces central banks more on the government on the fiscal side that forces countries to be responsible in the way that they're printing money.

Starting point is 00:26:20 Because right now there's no incentive for any country to be responsible from a monetary standpoint. It just isn't. You know, if you devalue the dollar that creates this dynamic where everybody wants to bring their foreign currency into the U.S., and that applies for, if you're over in Europe, Japan, or wherever, there's no incentive to be fiscally responsible because of the inflationary impacts that occur whenever you make your currency cheap. So that means that somebody has to return to a gold standard, which you know is not going to happen because there's no incentive for that to happen. So here comes this idea that in order for there to be some type of global peg, you have to have some type of global currency. And I know Jim Rickards has this SDR, special drawing rights narrative that he talks about. You know, that's going to be the thing that maybe goes. But I'm much more inclined to think that it's going to be something to deal with this cryptocurrency,

Starting point is 00:27:14 cypher punk movement, where they're creating a currency, a global currency that's completely decentralized, that has a fixed amount of coins, it could act like a peg. I'm curious to hear your opinion on this because I know Raul's opinion and he's, you know, I think he was all on board with a lot of the Bitcoin stuff and cryptocurrency, but I know that he has taken a completely different approach and he doesn't think that it has the legs to survive. I'm curious what your opinion is because I'm a big fan of this stuff. And I know there's a lot of people out there that will probably hear that and think I'm nuts.

Starting point is 00:27:48 But when I'm thinking about the solution to how all this can be solved, from the printing tool, you know, buying at any price, that has to end somehow. And I think you've got some really, really smart people in the world, specifically out in Silicon Valley that are trying to solve this problem. And they have huge network effects built around cryptocurrencies. I'm really curious to hear your opinion on how that weighs into all this. Yeah, I've done a lot of reading about this. I would never, in a million years, claim to be any kind of expert on it.

Starting point is 00:28:16 I'm fascinated by it as you are, as I think anybody is who's paying attention. And I always start by just separating the currencies from the blockchain. I think the blockchain is here to stay. The blockchain is revolutionary. Best way I've had it put to me was it's triple entry bookkeeping. And you don't go back once you've created triple entry bookkeeping, the same way we didn't go back when the Medici's invented double entry bookkeeping. So blockchain is here to stay,

Starting point is 00:28:41 and it's potentially the most revolutionary technology we've seen in our lifetimes. So I'm a huge fan of blockchain. Now, when you dip into the cryptocurrency, is it gets a bit murkier. When you can on a day like we had earlier this week when you have Harris Hilton, Floyd Crypto Mayweather and the rapper, the game, each issue their own coins, you realize that this is a tulip bubble of sorts. Now, when you say that, the Bitcoiners jump up in arms.

Starting point is 00:29:10 I'm not saying Bitcoin is a bubble. I'm saying the phenomenon of ICOs and coins linked to really nothing. Absolutely. will end in horrendous tears for a lot of people. But once all that happens and, you know, the pedals fall off the ugliest tulips, you are going to have stuff still standing. That's going to be very, very important going forward. My fear, for one of a slightly less emotive word, is that this libertarian movement wherein the whole blockchain started with noble ideals and a great way to decentralize and take control away from governments is slowly. building the walls of its own prison. And by that, what I worry about is, let's picture a world 25 years hence, where the US dollar is now a cryptocurrency and the US government has its own blockchain and you and I are forced to transact in crypto dollars.

Starting point is 00:30:08 And by doing that, there's a couple of steps here that can be taken. If trading cryptocurrencies is made illegal, 97% of the people, that use them will stop because they're law-abiding citizens, and if they're told it's illegal, they will stop. So the volumes will collapse. If then people are told, okay, the new currency is the crypto dollar, you're going to get paid in crypto dollars, your money's going to get transferred from your employer to your bank account. That's the gates going on, the prison cell, because you can't get your money out of that system. It's great for the government. They can tax you at source. You can't hide any transactions, real estate taxes, no money laundering.

Starting point is 00:30:47 A cryptocurrency blockchain answers a lot of questions from a government perspective. So I completely agree with you for countries that are living in a fiscally responsible way, that they could implement a blockchain-backed currency. But whenever I look at countries like the U.S., over in Europe, Japan, they're not in a situation where whenever you look at the snowball of debt that's compounding, if they would move to something that was crypto-backed, it'd be impossible. I don't think that it's possible for the U.S. to move to a crypto-backed currency because that would be the same as saying we're going back to a gold standard,

Starting point is 00:31:26 you know, a fractional reserve of whatever, you know, you give us this many dollars, we'll give you this much gold. They can't move to that model because it's physically impossible by the amount of debt that's accumulating. It would never last. They'd have to break it. They'd have to break their peg. So I think for some countries, you're going to see that role.

Starting point is 00:31:45 out. I think if you go to a country that's fiscally responsible, you're going to see them able to roll out some type of blockchain technology that backs up the currency. But in the U.S., I don't see that happen. I think that's impossible. So if that's a true statement, and your argument about the legalization part, I think is a very valid concern. But I think whenever I look at the U.S., let's just say Bitcoin, if the U.S. would make Bitcoin illegal, I think they'd be doing a huge disservice to the long-term viability of the country because the more people that are holding Bitcoin in the U.S., the better that is for the U.S. economy to be able to kind of shake out of this because it acts like gold.

Starting point is 00:32:24 It serves the same exact function and what country doesn't want to hoard as much gold as possible. And I think you'd see the same dynamic kind of play out with Bitcoins. The country would be very dumb to ban it. Well, yeah, I don't disagree with a lot of that. The one thing I would say is what we haven't seen in Bitcoin. yet is how it performs in a panic. Yeah. We haven't seen what happens in 2008 in a world where people have Bitcoin,

Starting point is 00:32:49 particularly where they've made huge gains on Bitcoin. You know how gold performs in those panics because we've had, you know, immeasurable number of them over thousands of years. So I'm interested to see how Bitcoin performs. And I think to your point, the politicians will need to come up with some new construct are acting out of necessity. I interviewed Jeff Gundack a year ago and he said, you know, greed is powerful, the fear is even more powerful, but there's one thing that's even more powerful,

Starting point is 00:33:14 and both than that's need. You know, if you need something, you don't have a choice. And that's where these governments are. You know, they need a solution to this intractable problem of having $100 trillion of entitlements that they promised to people and no money to pay it back. And that creates a problem where elegant solutions, if they can't be found, won't be waited for.

Starting point is 00:33:36 They'll come up with an in-elegant solution. and who knows what that could be. It's quite incredible to think through how this is all going to play out. You know, the more I read on it, the more I kind of think about how does this all end, especially when you talk about the quantitative easing aspect. I mean, eventually there's going to be a downturn in the market, right? It has to happen, whether it's next year or five years or seven years. You know, I personally think that we're in for probably one of the longest credit cycles

Starting point is 00:34:04 that we're ever going to see with the one that we're in right now. simply because of the idea that I think all these central bankers absolutely understand what's happening. And I think every one of them don't want to be at the helm whenever this thing comes crashing down because they've just pumped so much energy into it. And so you're going to see the exact amount of energy kind of pull out of it whenever it does have the downturn. And I think that they don't really have too much ammo left in their storage bay here in order to like keep this thing afloat. And so I think personally that they are going to continue to dance around this. I think they're going to talk about doing things that mean that we're going to

Starting point is 00:34:39 tighten the money supply, but they're really not going to do anything that's very meaningful. And they're just going to let this thing come to its own structural demise. And it's going to take some time for that to play out. Would you agree with that narrative? I'm kind of curious, would you think about that narrative? One hundred percent. Nobody empties their trash can when it's just about full, right? You keep jamming stuff in and jamming stuff in until it just can't take it anymore. And that's what these guys are doing. I think you're absolutely right. It's taken on a life of its own now. And so if you think about when was the last proactive move that a central bank made, I can't think of one. But what I do remember from my career in the city,

Starting point is 00:35:18 so it's not that long ago, is central banks getting punched in the face. And that was when the UK had to take the pound out of the ERM back in 1992. They said the day before, there was no way we I'll leave in the ERM and they woke up the next morning and they backed out because the market had basically seen their weakness and pounds. Yeah, that's the day, the famous day, like Monday that George Soros made a billion dollars. That happens from time to time. And the central bankers have had the upper hand for nine, 10 rounds since 2008, but they're tiring. And when you get to the end of the rounds, one punch can cause a lot of damage. And I don't know what that punch is going to be, but I know that volatility will not stay at all

Starting point is 00:36:00 time lows forever. I know the volatility in the world which is inherently volatile will pick up. And once that starts to happen again, it just makes the number of valves and levers that they have to try and keep together to keep the limb this whole thing too many for them to reach. So it's just a matter of time, but that's always the problem, right? We all can see kind of what's going to happen is to when. And frankly, I'm amazed it's gone on this long. And maybe they could drag this thing out for another year or two. Who knows? But the more. extended we get, the more dangerous it gets to believe that and invest solely on belief. So you brought up an interesting point when you were talking about wondering how crypto,

Starting point is 00:36:41 specifically Bitcoin, would perform whenever we get into a market crash condition. And, you know, there's some people that might argue that when we had the meltdown of the government there in Cyprus and also in Greece, during both of those scenarios, we saw a massive surge with Bitcoin in both of those scenarios. Now, I think that if you, you know, if you you'd see something play out in a more developed economy, a much bigger economy would probably be a better way to phrase it, I don't think that that's been proven, that you're going to see a flight to that, to the cryptocurrency in that scenario. But I think that seeing that what happened in Cyprus and Greece is quite an interesting thing. And you also saw some stuff down in Chile

Starting point is 00:37:18 with the inflation happening down there and a lot of the citizens inside of Chile running to Bitcoin specifically. It's an interesting conversation. Now, something, Brand, I want to ask you, because I've noticed, you know, I went out to this New York event and we talked to various really, you know, amazing investors. And it's almost like a taboo thing to talk about in public, right? And I'm asking you this specifically because you and I have a lot of similarities in that we interview and we talk to various people that have, you know, managed billion dollar portfolios or whatever.

Starting point is 00:37:52 But as soon as we're done recording, it's almost like that is exactly what they want to talk about is cryptocurrencies and Bitcoin specifically. Have you kind of seen a similar thing? Like, whenever you're not recording and the conversation kind of goes to the bar, is that what people are wanting to talk about? I'm curious. Undoubtedly. And I think a lot of that is due to the fact that it's so new, it's so noisy, and so few people really understand it. So everyone's trying to soak up as much knowledge as they can. And, you know, what I found, the smarter the guy, the more they want to talk about Bitcoin. I've seen the same thing.

Starting point is 00:38:32 Yeah, but it makes sense, right? Because the smart guys understand you. I need to understand this. This is not going away. This is technology that's going to be with us for a long time. And I need to understand. I interviewed Kyle Bass a short time ago. And he actually said, he said, you know, I have a confession of my guy.

Starting point is 00:38:45 I blew off Bitcoin. I blew off blockchain. I didn't listen. I didn't pay attention to it. But it's got his attention now. He said, you know, I was late. But now I'm soaking up everything I can about understanding how it works and understanding the role it has to play in the future because it's clear it has a

Starting point is 00:39:01 very important role to play. So I'm seeing exactly the same thing to you. Everybody wants to talk about cryptocurrencies. And I completely understand that because I want to learn more about them too. So this is an interesting thing. And I really didn't intend on talking about crypto hardly at all, but it's kind of interesting how this is developing here. So Howard Marks comes out with his oak tree memos that he puts out and they're always so awesome. You know, I'm a really big fan of Howard Marks. He's a billionaire that we study. And in his last memo that came out, he just crushes crypto.

Starting point is 00:39:34 I think he said four or five times in there, it's not real. It's not real. And he gives really superficial reasons for what he had. I read through this. And after I was done reading it, I just came to the quick conclusion. Howard Marks does not understand this. Like, he hasn't done a lot of research on it. It was really obvious based on the arguments that he was making against it.

Starting point is 00:39:52 And so lo and behold, literally last night, I get an email. Howard Marks has a new memo that came out. And so I immediately click on it and I start reading through it. And it was, I guess he got more feedback from his last memo that came out, the one that I was originally referencing about where he bashes crypto. And so he has a response. So I read through this thing last night. And I mean, it was a doozy of a response. He's there talking to Mark Andresen.

Starting point is 00:40:20 He's talking to all these, like referencing all these people. and he's talking about his basically going back on a lot of the stuff that he was saying about cryptocurrency and basically said, you know, this might be something. And I think it was the most delicate way that he could say, hey, I might have been wrong about what I was writing. And there might be a lot of merit to some of this stuff. And I'm still learning was basically what he was saying. But I mean, there was a huge write-up on this. I'll have it in the show notes for people if they want to read it.

Starting point is 00:40:46 Yeah, it's funny. The thing about cryptos, which I think makes it difficult for a lot of people to get to his writing is because it's completely ethereal. So people, they're talking about these coins as if they have a value. A value generally tends to be physical. There are things that have sentimental value or whatever. But when we talk about value, particularly investing, it's a physical, it's a tangible asset. It's a stock bond.

Starting point is 00:41:09 It's a house. It's a commodity, whatever it is. So I think the fact that these cryptocurrency are just code throws a lot of people off. And a lot of people just equate bits and bites with nothing tangible. therefore it can't really have any value. So I kind of understand that. What's amazing is how fast if you start to read and you start to

Starting point is 00:41:30 really try and seek out people that understand this and get them to explain it to you, you very quickly understand I think as from what you're saying, how it has, actually there's something here. I need to do more of that. And I think everybody has to get to that point. There's two schools right now. There are the schools that see it as a get rich quick scheme.

Starting point is 00:41:49 A lot of the sort of ardent super crypto fans don't have a clue how it works. They just see the price going up. And if you're not on the train, you're an idiot. We saw that in 99,000 with tech stocks. Exactly the same. And then you've got the guys who are building incredible companies, developing incredible technology on the blockchain.

Starting point is 00:42:07 And when you talk to those two groups, you have two completely different conversations. You have a group of people, as I said, who it's all about the price. And if you're not buying Bitcoin, you're a loser. And then you have these guys that will sit down with you and they want you to understand it. They want to explain it to you.

Starting point is 00:42:22 They really want your knowledge to go up because they feel it's important. And I feel it's, it is the future. And the more people they can educate about it, the better. And there are a lot of people like that out there. And if you seek them out, you'd be amazed how much time they will be willing to sit down. Because it's a passion of this. You know, they're passionate about blockchain. They're passionate about the technology.

Starting point is 00:42:44 And they're passionate about transmitting that and finding more people to try to come into that world and accept it. So I think it's here to stay. There's no two ways about it. I think we're going to have a period where a lot of these coins go away and there'll be all kinds of bad press and there'll be all kinds of malfeasance. I think that's inevitable. But once we get through that, you know, I think Kyle said this to me, said there's going to be one big step change in the Bitcoin community

Starting point is 00:43:09 and then it'll find some kind of stability. I think he's right. But that stability will come with a massive contraction in the number of coins. Well, certainly high-priced coins. I mean, people are going to have their own blockchain change with their own little coins, but they're not going to be able to raise $75 million for them. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:46:32 investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Yeah, I think most of the concern, I think when you're talking about the bubble in this stuff, really kind of comes out of the Ethereum side with the initial coin offerings that you're referencing there, which is completely detached from Bitcoin itself. And this is something that if you don't know anything that we're talking about right now, I'd tell you, go out read a book. One of the books that I really liked was called The Age of cryptocurrency, fantastic book that really kind of gives you a base fundamental understanding of

Starting point is 00:47:13 of what we're talking about. All right, guys. So let's shift gears here a bit. And Grant, I watched your interview with Richard Koo the other day. And Richard Koo is a super smart economist. And he's been doing a ton of study into what we're talking about today, about quantitative easing, what's happened in Japan, what might happen in the U.S. And Preston and I have been a big fan of his work for quite some time.

Starting point is 00:47:37 Actually, already back, I think it was episode 32. We had an episode about balance sheet recession, which is what he's known for. And also the quantitative easing trap that we already back then talked about would have a huge impact on the financial market. So, Grant, could you tell us about the main thesis he had and what we and the audience can learn from that discussion? Yeah, he's a brilliant man and super nice to be. He was just so gracious for this time. Richard's famous for this concept of the balance sheet recession. And if you think of it, it actually makes perfect sense.

Starting point is 00:48:10 sense. You're talking about you've had a massive buildup of debt, you've got a massive inflation of asset prices, and then you get the bust. And what happens is investors, entrepreneurs, consumers, they hunker down and they don't want to invest. They're traumatized effectively is what's happened. So they may still have decent cash flow, but they're going to take that cash die and use it to pay down debt instead of investing instead of spending in the economy. So you get into this stuck situation where the money won't go back out into the economy. And I think we've we've seen this so, so clearly. Where Richard and I diverge slightly is his solution, as a lot of people's solution,

Starting point is 00:48:46 is the government steps in and takes the place of that spending by consumers and businesses until such time as the economy is back on its feet and people have forgotten the trauma and they're happy to come out of their shelters and start spending their money again. That's in a nutshell what it's all about. And his book is brilliant. The evidence he puts forward is absolutely brilliant. Tart was a perfect example of that. The government needs to step in and do this.

Starting point is 00:49:12 But if you look at what's happened in Japan, where they're 20 years into this, and you could argue that maybe in 2005, 2006, we'd started to see that the effects that they were looking for happened. The economy was starting to grow, and that got crushed by 2007, 2008. But that was still 15 years after they began this thing. So it's yet to be proven if this works or not, but it's yet to be proven, but it doesn't work. So we're kind of in that twilight zone. I think from a human perspective, from a psychological perspective, it makes all the sense in the world to me. I think the way of thinking that he's identified

Starting point is 00:49:47 is exactly right. I think the behavioral side of it is exactly right. And the initial solution also is arguably exactly right. And again, we go back to Japan. The Bank of Japan have been doing this for 15 years longer than the US. No sign of them being able to unwind their balance sheet yet. in fact quite the reverse. So the US is kind of the next cab off the rank. Are they going to be able to do this? As I said, I don't give them a county health chance. But, you know, we're all guessing about the future. Well, over in Japan, they're getting to the point where they're running out of securities to buy, correct? Yeah, that's exactly right. The Bank of Japan owns, I think, 35 or 40 percent of the JGB market now, and either just above half or just below half of the

Starting point is 00:50:31 ETF mark. And that's a very dangerous place to be for what's the third largest economy in the world. It's an incredibly dangerous place to be. I mean, picture the Federal Reserve owning 50% of the US ETF market. I mean, it would be what would have to happen for us to get there is frankly terrifying to me. I mean, in effect, what you're really doing is you're nationalizing all assets in the country. It's exactly what you do. It's almost like you're in this autocratic form of government where now the government owns every single business. But it was done in this manner where cash or liquidity was swapped for all.

Starting point is 00:51:06 the assets and then all of a sudden it's sitting on the government's balance sheet. You know, the one thing I would say, Preston, it's sort of a plea to the listeners is all these things we're talking about, whether it's Bitcoin, whether it's the Trump presidency, whether it's the North Korea, all these things, it's such a shame that the ability to have civil disagreement has just vanished recently. And you see in cryptocurrencies, is people are just so fixed on either side and unwilling to stand in the middle and talk about this stuff. And some of the stuff we're talking about here, I'm sure there are many people sitting

Starting point is 00:51:39 saying I'm the greatest idiot the world's ever seen. But it's important to just seek out people that are willing to have these discussions and talk to them and get the other side. There's no right. There's no wrong. We're all trying to figure this out. And I find it such a shame how quickly comments, threads and the like just devolve into name calling and ad homonym attacks when there's a whole world of people and you know you put this

Starting point is 00:52:05 fantastic podcast out that reaches so many people and in those communities this ability to have civilized disagreement has never been more important than it is right now and it's never been more lacking than it is right now and I think it's such a chance I would just I would plead all the people listening to this to don't write us off but debate it talk about it get other opinions and just try to understand that none of us have an answer, but there's an answer out there, and there are just all these different pieces of it you can put together. Howard, going back on his Bitcoin, is a great example. You can. It's okay to be wrong. It's okay to change your mind.

Starting point is 00:52:42 You don't have to be dogmatic about everything. So I'll get off my soapbox now, but I just think it's so important that people try and regain that lost art. You're so right about Howard Marks, really setting the example of here's a guy, huge public platform, goes out there and says some stuff and is willing to listen to other people and change his opinion within a month, change his opinion on things. I'm going to mess up the quote. But Munger has this quote about if you can't argue the other side of the opinion as well as the side that you have, you should probably just shut your mouth.

Starting point is 00:53:13 And I love that idea because how many people are out there talking and just voicing their opinion and really kind of digging in and becoming dogmatic about their opinion when they can't even start the argument from the other side. And so that's Munger's way of saying, hey, if you can't argue both sides of this and really understand the vantage points that every person could see it from, you don't even understand the issue. So shut up and start listening. It's so true. It's so true. Well, Grant, such a pleasure to talk to you. I really look forward to these interviews every time we get a chance to sit down and chat. It's fun for me to talk to you because you're doing it seven times a week where we're doing it once a week. So you're putting in a lot more hours than I have ever put in on this stuff. But it's fun for me to sit down and talk to you and kind of kind of. compare notes with some of the people you've talked to compared to the ones that we've talked to. And just, I really enjoy these exchanges.

Starting point is 00:54:03 So thanks so much for coming on the show. Oh, Presti, you guys do an absolutely phenomenal job. So I'm flattered to be invited on a month, such an illustrious cast of character. So thank you for having it. Well, Grant, thank you so much for coming on the show. What I really want our audience to know is Grant also has his own podcast with Real Vision. It's called Adventures in Finance. This podcast is phenomenal.

Starting point is 00:54:25 You can see how intelligent Grant is. So if you're listening to this, I'm telling you, go on to your app of whatever you guys are using and go ahead and subscribe to their Real Vision Adventures and Finance podcast. Grant, is there anything else that you want to add to what you guys are doing with the podcast? Well, look, we had a, it was just about to start season two. We were just blown away. We had a million downloads in season one, which was, which is phenomenal. We're going to switch things up a little bit in season two. We're kicking things off.

Starting point is 00:54:51 I've got a few financial legends that were going to co-host with me. We actually launched our first one last night with Kyle Bass, sat in with me for the hour. Next week, I've got Hugh Hendry joining me. Hugh and I have got a bit of unfinished business. We need to thrash out, which is going to be fine. We've got Jim Rogers lined up. And many more, including yourself, you've agreed to come on.

Starting point is 00:55:07 So we're going to make sure you stand by that. Oh, yeah. I just want to get what you do, a sense of what makes these guys tick. We're going to get people to talk about a pivotal moment in their lives, some of the investing mistakes they've made, which has been an incredibly popular feature, and get some questions. So, you know, the best thing that listeners can do is, you know, sign up to the podcast, send questions in that you want to ask these guys.

Starting point is 00:55:28 And the podcast goes out every Thursday night. It's called Adventures in Finance. And it goes out on Thursday night, I think about 9 p.m. Eastern time. Thanks, Grant. I download your podcast every Thursday. And I highly recommend anyone in the audience to do the same thing. And thank you, Grant, for coming on the show. Preston, I really hope we can invite you once again.

Starting point is 00:55:47 Preston again. Thank you for having me so much. All right. So at this point in the show, we're going to go ahead and play a question from the audience. and this question comes from Corey. Thank you, Preston and Stig for taking the time to listen and respond to my question.

Starting point is 00:56:01 I need to start off by acknowledging the incredible amount of time and effort you guys are putting into the Investors' podcast and the tremendous amount of value it has been to me and obviously so many others. Thank you so much for your continued dedication to this world and the quality and volume of information that you so willingly share.

Starting point is 00:56:19 With that said, I have a question about interest rates and how they influence individual company valuation. Stig put out a great recap based on Mr. Buffett's book, Tap Dancing to Work, regarding how interest rates affect the stock market. This was really interesting to see so clearly put, but I'm really curious to know how you two factor in the current interest rate when you run a discount cash flow analysis on an individual company

Starting point is 00:56:46 or when you're thinking about the future earnings and growth prospects of a company as it relates to a valuation metric. So, Corey, I love this question and you're going to see why. So when you're talking about interest rates, I think so many people get caught up in this idea that because interest rates are super low right now, I have to settle for a much lower return. And that might be true if you're buying publicly traded companies or you're buying stocks on the stock market. That is a true statement.

Starting point is 00:57:17 But what I would challenge people to do, and this is how I, personally think about it, and I know this is how Stig thinks about it too, is think operationally first. How can I create a product? How can I create a service? How can I start a business around an idea that's going to give me a much higher return than 2%, which is where the 10-year treasury in the United States is? And you're probably getting a 3% by being in the stock market. I think that those returns totally stink. And I think that they are a very little return for the amount of risk you assume because of the credit that's in the U.S. economy. That's my personal opinion. So as a result, I'm not settling for a two or three percent return and I'm looking at

Starting point is 00:57:59 investing more operationally in my own business and creating assets or services or whatever. I think that's how people need to think. If you don't have that as an option or you're not comfortable running your own business or any of that stuff and you want to invest in public markets, what I would tell you is you have to really do a lot of research and you have to, you have to settle for lower returns because of how polarized interest rates have become, which has been induced by central banking policy. So that's how I see this. And you can see this playing out with Warren Buffett. You know, when we were at the Berkshire meeting back in May, somebody asked the question about his recent purchase of precision cast parts. And the business, I think he paid a

Starting point is 00:58:40 PE of around 30 on the business, which, you know, gives you about a 3.3% return, assuming that all the net income is free cash flow and whatnot. But that's, that's, a really important thing. And when the person asked Buffett, he said, you know, is this something that is a new norm that we're getting a lower return? We're paying higher premiums on businesses. And Buffett and Munger basically said, yes, that's a new norm. And we're going to have to pay higher premiums to own these businesses and we're going to get lower returns. So that's my thoughts on interest rates. I'm really curious to hear what Stig has to say on this one. So I'm really happy you brought this up, Corey, because a lot of investors really don't think too much about the interest rate,

Starting point is 00:59:18 especially now that it's so low, so it's almost like, let's just forget it. So there, let's just act if we're investing like there's no interest at all. It's more or less free money. But what you refer to is really crucial. So what Warren Buffett talks about is the so-called 17-year cycles. And the first one that I would like to mention is the one from the mid-60s to the early 90s, and specifically 81. And you saw the interest rate go up from around 4, 4.5 percent and up to 15 percent. And this is on the 10-year treasury. You just saw like the interest rate being highed again and again. And what happened to the stock market? It was more or less flat, even though the P rows and corporations were making more and more money. The stock market barely moved.

Starting point is 01:00:04 And then from 81 and then to the next 17-year cycle, then to the late 90s, as some of you might remember, we're approaching the dot-com bubble here. And you saw the exact opposite. So the interest rate was just slammed. And it went down to around 4-4-4-5. and a half percent again. And you saw the stock market perform 11x, 11x in only 17 years. I mean, it's almost impossible to find them that it can go so fast. And a huge part of that, at least according to Warren Buffett, that was because of the interest rate. So Corey, regardless of what the interest rate is going to do, we don't know. I think there's a lot of opinions, whether or not it will stay down and go up or whatever will happen. In the current environment, what it means today

Starting point is 01:00:46 is that you have the discount rate that you're talking about the interest rate and you also have growth. And when you don't have the availability, for instance, as you saw from the early 80s to the late 90s to lower interest rate, you simply need to expect another type of growth. So to expect, call it 10% or whatnot, if you're looking at something for a long period time, it's just going to be really, really hard because the central bank can't go in and support the economy the way that they've been used to. to simply use that remedy too many times now. So I think in your evaluations, you should probably just be more modest in your growth expectations in the future. All right, Corey, really appreciate the question. I know Stig and I have a tendency to go long-winded on some of our responses, but we really

Starting point is 01:01:32 do appreciate you calling in. Hopefully it was value add for you to hear our response. For calling in, we want to give you the brand new intrinsic value course that Stig and I just completed. We got a bunch of hours of content created there. We've got our intrinsic value calculator built into Excel. We have videos teaching people how to use this stuff. We even have an options portion on how to mix value investing with options based on some of the stuff that Jewel Greenblatt's written all wrapped into this course.

Starting point is 01:02:00 So we're really excited to give this to you completely for free. And if anybody else out there listening this wants to check out the course, it's on our TIP Academy on our website. All right. So if you want to get your question played like our guests here, just go to AsktheInvesters.com. And if you go to AskTheInvesters.com, you will see there's a little recorder there. You just hit record and you can ask your question. And then it goes right into our queue. And if we select it and played on the show, you get access to one of our courses. All right, guys. That was all that pressed on I had for this week's episode of the Investors podcast. We'll see each other again next week.

Starting point is 01:02:33 Thanks for listening to TIP. To access the show notes, courses or forums, go Go to TheInvesterspodcast.com. To get your questions played on the show, go to AskTheinvesters.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

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