We Study Billionaires - The Investor’s Podcast Network - TIP300: Current Market Conditions w/ Preston and Stig (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, hey, hey, it's the Big 300O. During this episode, Stig and I simply talk about the current market conditions and the many challenging situations people are facing in the world today. Additionally, we really want to say thanks to all of our listeners out there. Your support and always being there for us is something we just can't even put in the words. So, cheers, and here's to the next 300 shows. 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 00:00:44 Hey, everyone, welcome to The Investors Podcast. I'm your host, Preston Pish. And as usual, I'm a company by my co-host, Stig Broterson. And boy, 300 Stig, 300 episodes. is it's a little crazy to think about us sitting down and having these conversations 300 times. Oh, God, yeah. And what is it like six years ago since we chatted and we're like, should we do a podcast? How do you do that?

Starting point is 00:01:16 And here we are. There was a lot of unknowns because neither one of us have much technical skills when it comes to anything like this. We figured it out. And yeah, it's great to be here. And we won't drone on about some of those stories. too much. We'll hop into the episode, but pretty exciting for both of us to hit 300 episodes, if you would have told me that when we started that we would have done 300 shows like this. Oh, my God. All right. Let's go ahead and cover this first topic that we have, and we're just doing

Starting point is 00:01:47 a current market update. We're just talking in general, the two of us here for episode 300. Just pressing his Stig kind of episode. But the first topic that Stig wanted to cover was corporate debt and the Fed. Yeah, so not a current mild condition, if it's so without the Fed. I guess that's what we're seeing right now. And almost like, how can we with everything that's been going on? I took a chance to read up on the Fed here the other day. And we always do that.

Starting point is 00:02:18 We look at what they're doing. We clearly, we follow the news. But I kind of thought I wanted to go back to the very root of the Fed in the sense that what is the function of the Fed? And there's actually three very specific goals that Congress had mandated the Fed to do, and that is to maximize sustainable employment, stable prices, and moderate long-term interest rates. And I sort of felt that was interesting to mention because I know that we tend to bash the Fed, and perhaps you will see a bit of that here in this episode.

Starting point is 00:02:52 But I think it's also important to say that the Fed is not created to become the best possible system for value investors. No one's ever said that. Specifically about the Fed and stable prices, you know, it's designed to create inflation. And you might say it's a wrong objective to have, but I also think it's important that whenever you see all the things that the Feds are doing and you're thinking, what is it doing to your portfolio, what does it do to whatever, it's more or less doing what it's been asked to do. And I think that's super important to understand because We might not agree with the Fed, but we need to navigate a world where the Fed plays such a big role. So I wanted to kick the episode off by talking about the objectives of the Fed,

Starting point is 00:03:35 and then perhaps we can talk a bit more about, so what do we then do as value investors based on that? Now, so as Preston mentioned that before, I wanted to talk about corporate debt, and it's such an exciting topic to talk about. The market itself is huge, $10 trillion, and it has ballooned recently. This is a day and age of new. new all-time highs. Back in April, a loan, there was $300 billion of new corporate debt issued. And again, that might not be too surprising because so many companies have issues with financing, but it is very interesting to see the intensives that these companies have perhaps doing it right now. I couldn't help but notice two billionaires that Preston and I are following and what they had to say.

Starting point is 00:04:19 Jeff Gunluck was out early in the game and he talked about how weak corporations are speculating on the facts action. Warren Buffett talks about the Fed moves could have extreme consequences. I kind of found that quote interesting too. Now, to talk a bit more about what is specifically happening right now, the Fed has teamed up with BlackRock to buy back corporate debt. And like we covered last time, this is both investment grade, but also some high yield bonds that they're looking to purchase. And one of the things, and that's because I'm such a nerd, one of the things that I enjoy reading is whatever the Fed are making a statement, and then, you know, it's sort of like up to us to like figure out what they mean by that. But they're saying that the size of the purchases

Starting point is 00:05:05 would vary based on mild conditions with a goal of reducing the deterioration of liquidity seen in March 2020 to levels that corresponds more closely to prevailing economic conditions. And I kind of felt that was a funny phrase because you could basically read into that what you want. But to me, it seems like We are just getting started. Let me just put it like that. But what I really wanted to talk about, especially for us as value investors, is it's hard to know for sure what happens when this plays out.

Starting point is 00:05:39 But I think what I don't like is how you're messing up the capitalist system. And it sort of like goes back to the objective of the Fed, say maximizing sustainable employment. I think that there is a huge risk. that you might be doing that in the short run, but not securing a good system in a long run. And let me just come up with a simple example of what I mean by that. Capitalism is a fantastic system because it has a really strong feedback loop. If we take the example of an ice cream store, it's very simple that if you don't sell good ice cream at a fair prices, you won't have any customers and you will just go out of business.

Starting point is 00:06:21 That's capitalism and that is what has made American companies so great. able to compete on the global scene. You have competition where the best survives. Now, if we compare that to the situation with corporate debt, in a capitalist market, everyone can issue debt at any time. However, and this is the important thing, they can only issue debt at market prices. So if you don't have a sound business, you will either not have anyone who is willing to lend your money, or you will be forced to borrow money at such a high interest rate that you might or will likely fall on it unless you are very, very skilled. And yeah, these are the bonds that are typically referred to as junk buns. But if we go back to the example of an ice cream store,

Starting point is 00:07:05 let's imagine that you own that store and every day you have a person walking into the store buying all your ice cream, huge quantities. And the buyer doesn't care about the quality of the ice cream, nor does he care about the price because he has free access to money. He has free access to money. Now, what would happen? Well, what would likely happen in a situation like that, you being the owner of ice cream store, is that as a result, you will start to dilute the quality of the ice cream and you will stop having this positive feedback look where the best one survives, and you become completely dependent on that buyer. Because if that wealthy buyer is not there, you don't have a business anymore. And I think that is what we're seeing right now. We're only

Starting point is 00:07:44 seeing the very beginning of what could potentially erode some of the fundamentals behind a capitalist system. The Fed so far only deployed $100 billion, and they have pledged at least $2.6 trillion for this program. So to me, that's very concerning. If you look at the balance sheet just in general, we were less than $4 trillion before COVID-19. You're already up more than $7 trillion. dollars. So that's sort of like my bleak way of kicking off this episode 300. Yeah. So Stig, you know, when we're looking at the debt globally from a global level, because you were talking about the amount in the U.S., but I'm looking at it from a global scale because really the U.S. Fed is servicing dollars at a global scale. And I think that

Starting point is 00:08:35 when we look at all the social unrest that we're seeing around the world on a global scale, that's while you're seeing it so coordinated, and I use the word coordinated meaning when you look at all these different countries, they're all having protests. They're all having social unrest. So you have to ask yourself, what's a common thread that would cause such a thing to occur? And for me, it's the money. And for me, it's the central banks that are controlling that supply of money. So just to throw out a number on the corporate debt globally, back in 2009, the number was $34 trillion. Today, it's at $51 trillion, and that's a 2019 number. So I'm assuming here in 2020, it's even way higher than that. Here's the issue that I have, right? When you talk about

Starting point is 00:09:21 inflation, because what Stig was saying, their first thing is to create a stable economy through a stable, small amount of inflation. There, and I've talked about this on the show, I talk about this on Twitter all the time. I'm going to try to get into more detail on this idea of what is inflation. And if you're measuring inflation, the CPI bucket, right, which is items A through Z, and when you scope that and you say these are the things that I'm going to measure in order to say what inflation is or isn't, opposed to every single thing in the economy, I think you get very skewed results. And so from the Fed's perspective, they're saying, we're adding all this money, but we're not getting any inflation. Now look at the CPI number. It's abysmal, right? But you go back to economic

Starting point is 00:10:12 theories and ideas and you read about these people who wrote extensively about money supply in central banking and what causes economies to fail. And what you can find fascinating is this Yardini organization publishes daily a report of the ever-growing total assets of major central banks. And so if I was going to tell you what I think, the inflation of money, and it's very important that we talk about the inflation of money and not the inflation slash deflation of price of particular items in the economy. Those are two very, very, very different things. So I am talking about the inflation of the money supply. If we look at this pre-2008 crisis to today, your number was like slightly under a trillion dollars of assets sitting on the U.S. Fed's balance sheet. Today, we're over

Starting point is 00:11:14 $7 trillion. Okay. So it was like 0.8 or something like that. And now we're at $7 trillion. So whenever I look at that and I say, well, how much, what inflation rate is that if we're looking at that being the inflation rate of the money supply? What does that come out to be as a percent if I annualize that going from 0.8 to a 7? Well, guess what? Over that period of time, that's a 22.9 percent inflation rate, right? That's massive. That's insane. So, and the reason why I want to focus on that number is because that money's going somewhere.

Starting point is 00:11:55 It's not like it's just disappearing. The money is going somewhere. And guess where it's going? The money is going into stocks, bonds, real estate, hard assets, and they're getting bid higher and higher and higher in market capitalization. And when I say market capitalization, what I'm saying is those companies kick off earn And then the market says, oh, well, if it made $10 this past year, it's worth $100 because that gives me a 10% return if I buy it at $100 price.

Starting point is 00:12:27 That's a market capitalization, right? So when you're stuffing money into the economy at the tune of 22.9% annually since 2008, right, since the end of 2008, guess what? It's going to inflate certain prices of certain things. Well, guess what? Stocks and bonds are not in your CPI bucket, folks. They're just not. It's that simple.

Starting point is 00:12:53 It is that freaking simple. Right. So these things are getting bid in the market. So then the next question is, well, why is it going to stocks and bonds and real estate and things like that? Well, follow the money. If you started at the point of initiation of a new dollar of this inflationary 22.9% money supply, right? If you start at where that money is created and then insert it into the economy,

Starting point is 00:13:22 the immediate insertion point for the last 10, 12 years, right, has been the bond market, period, period, the bond market. They take the freshly printed money, they step into the bond market, and they buy whatever bonds are on that market, and they put that cash into the system. And then that bidding of the bond market raises the price, drops the yield, and then if the owners of those bonds want to go and sell them on the market to then go buy stocks, they can go do that. But the fact of the matter is, is the money supply is growing at nearly 23% annually, based on just a simple look at the balance sheet of the U.S. Fed Bank. Now, if you go and you look at some of the other central banks, they are also a

Starting point is 00:14:13 aggressively raising theirs as well. I could go back and do the calculation for all these other banks and guess what? They're right there with the U.S. Fed. So when you look at that on a global scale, I would tell you that I think the inflation rate of the money supply over the last 10 years globally is in excess of 20%. And you're not going to see any college professor, any economist, talk about that number because they're hyper focused on, I don't know why, but, well, I guess I do know why. They have an incentive to not allow interest rates to go up because they fiscally can't afford it in pretty much any country around the world. That's probably the incentive. I think that that's the concern. And what's fascinating about all of it is these central banks

Starting point is 00:15:01 are the things that Stig read off that they're trying to march towards in order to create stability. They have created stability over the last 80 years. They have done that. But the irony of all of it is if you control something for so long for 80 years, maybe at the end of that, it actually creates the exact opposite of what they intended to do. It's almost like a parent who's trying to raise the perfect child. They create this stability in their life because they protect them from whatever. And they raise them for the first 18 years of their life. And then after that, the child has to move on.

Starting point is 00:15:42 And that stability that the parent created was actually instability to their ability to actually step out into the world and live in a real environment. And I think that that's kind of what we got going on right now. We have lived in this world where the central bank, have stepped in, manipulated the market in order to protect and stabilize the market, only to create this world where businesses don't have a rainy day fund. Like the COVID hit and people stopped showing up to the businesses. Well, mass amounts of businesses failed within the first two weeks. They didn't have enough liquidity to even make it two weeks. And I think if you went back

Starting point is 00:16:23 into an environment that hadn't been manipulated for that many decades before all this kind of took place. You'd have businesses that could have lasted five months without another paycheck because they had a rainy day fund. They had a treasury of whatever on their balance sheet in order to withstand hardship. You're seeing that on a personal level that people have spent and spent and spent because they've been incentivized to spend because the money loses its value so quickly. And when that has been incentivized and people have no rainy day fund, well, they feel the pain immediately. All right. So the next thing that I want to go through is investing in international markets. So I know Stig, you have some comments on this. So I'm going to throw it over to you. Last time, whenever we had one of

Starting point is 00:17:05 those monthly, my conditions discussion, I talked about how I was heavily exposed into U.S. equities and how I wanted to diversify away from that, not just because of market manipulation, just also that the U.S. stock market engineering was very expensive. And I've gotten quite a few responses on that, not just from people in the US who wanted to invest internationally, but also international listeners who were just interested, because we all seem to have home biases one way or the other. And actually, I found some interesting stats about a home bias. Typically, American retail portfolios would have between 70 and 90 percent of their portfolio in US equities. And that is considering that the US market is just above half of the global stock market. That being said,

Starting point is 00:17:52 if we're using a global portfolio as a benchmark, the Americans are doing much better and the rest of the world in the sense that Canadians and Australians, they have similar trend. They typically have around 60% of their portfolio in domestic stock, but their market cap are not more than 50%. It's like 3% and 2% of the global market cap. So we see a strong home bias that comes from us feeling that we are more familiar with the stocks, more than necessarily because we've done a proper valuation of that. And so if we're looking at the S&P 500 right now, I think we're what 1% cheaper than it was before COVID-19 or at least just before a momentum tool turned red. And yes, the stock market is not the economy and the economy is not the stock

Starting point is 00:18:37 market. I know we keep saying that, we keep hearing that. But, you know, it is a reflection of corporate profits, what the stock market is supposed to yield. And I'm thinking, well, we had COVID-19, we have all the social unrest that Preston talked about before, knowing that the stock market was quite expensive before COVID-19 started, do we really feel that now we are around a failed valuation? I would say no. I mean, what we see now is it's an even more obscene valuation but compared to the underlying fundamentals.

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Starting point is 00:22:52 Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Stig, I just want to add something in there when you're talking about valuation. It'd be like trying to measure something on your table with a ruler that's just constantly

Starting point is 00:23:25 getting longer, right? So, or I think in this situation, the ruler would be getting smaller, making you think that the size is getting bigger. So you're going up and you're looking at the piece. of paper and you're saying, oh, well, it's 10 inches or 12 inches today. And then you come back tomorrow and the ruler got smaller and you're measuring that same piece of paper. And now it's 16 inches today. That's effectively what you have going on in the market. So when you're thinking about valuations, people have to think in that lens of the thing that I'm measuring this

Starting point is 00:23:56 with keeps changing every single day in a major way. I agree with that. And basically what you are referring to here, just to clarify, if ever, is that you see this debasement of money and you talked about the huge money flow coming in. So you might say, you know, S&P 500 trading at 3,000 today is not necessarily as the S&P 500 trading at 3,000 at another point in time. It really comes back to also the earnings. And so whenever I talk about the evaluation here, because your point is definitely completely valid, whenever I talk about the earnings, I'm not just talking about, well, you know, if we keep on seeing that influx of money, that would also be reflected in earnings, at least in the nominal numbers. But I'm also thinking, what do I expect will happen to those

Starting point is 00:24:38 nominal numbers? Even if we look away from that inflation coming in, what do I expect that to happen? I don't necessarily think it looks like fantastic. In that sense, I don't feel it justifies the valuation on the nominal numbers. The S&P 500 trading at 3,100 today. But going into the discussion here about diversification, the point I really want to drive home here is to figure out what we want to invest in, we need to put it in comparison to something else, one way or the other. And so what most investors do is that they typically look at the whole market first, as I mentioned before, because that is what they feel most comfortable with, or they'll look at the story of returns from various stock markets. And then they sort of tend to extrapolate those

Starting point is 00:25:21 results. And the issue about that is that there's typically good reasons and good stories why you would do that. So just in the US, you would have NASDAQ that has upperformed the SP 500. And if you look at some of the reasons for that, just Google it. Or if you speak to people about it, you know, people can give you really good explanations why that's happening. Yeah, this is why Apple and Google and Amazon will outperform. And it all sounds good and well. But my argument is that all history would tell you if something has gone well for a long period of time, it's because there is an overstatement of that real underlying effects. So going into this. episode, I looked at some of the major indexes over the past 10 years, just sort of like to prime

Starting point is 00:26:03 the conversation. The S&P 500 has returned 11.7%. All international markets outside of the US, market weighted has returned 3.2%. Emerging markets have returned 1.3%. Europe has performed 3.6% and Niki 5.8. So I kind of felt that was some interesting stats to look at. And so what I did then was, I looked at the evaluations of the different markets and no surprise, you know, the US was very expensive because, yeah, they had a really good run for a long period time. And I looked at some of the research that's been conducted and Lynn Alden did some very interesting research on this and we'll interview her in a few weeks. But she had been conducted some research specifically based on Sheila's PE. And she also looked into some of the research that Doc Short, which is another

Starting point is 00:26:57 economist, the press and I follow. have been conducting too, and we'll make sure to link to this in the show notes. It's a very interesting write-up she did of that. And the evidence is very clear because not just in the US can we see that if we have a high shield of PE ratio, it would lead to sub-power returns in the following decade. But it's evident throughout all international markets that you look into. The only exceptions were Denmark and Sweden, but that was for different, very, very different reasons. But we see that across the world. And so that would be my word of caution as you were thinking about diversifying, like, don't look too much at past performance. And I wanted to be a bit more

Starting point is 00:27:34 hands-on with some of the different strategies you can apply if you want to diversify. The first strategy is very, very simple. You can go in and buy something like Vanguard's ETF VT. It's a very cheap ETF, 0.08 in expense ratio. It's very cheap. Now, keep in mind that you are 57% invest in the US if you buy a global ETF. So if you already have a bunch of individual stock picks or you have BSP 500 in your portfolio, you're not diversifying inequities as much as it seems. So if you are heavily exposed in the US, one thing you can do is to invest in all international markets and Vanguard thought of that too. And again, the cost of that is eight basis point or zero point zero point 0.8%. And I just want to clarify, I don't have any affiliation with Vanguard, but the only

Starting point is 00:28:25 reason why I typically bring up those tickets is because they have a good track record of low cost and good at tracking indexes as well. And so that's a way to do it. And if you did that, you would be 4% in Europe, 23% in the emerging markets, almost 30% in Pacific. So that's a way to go about it, which is not as specific. Of course, you don't go in and target which markets you think are the best, but it's a way to diversify away from the US. So alternatively, this is sort of like the theoretical, the optimal way to do it, but it's also a tricky method. That is that you can make valuation of each international market and then allocate your funds to the cheapest market. Generally, I do not recommend that you do individual stock picks unless you really know the market

Starting point is 00:29:11 well, but rather that you buy an index, for instance, for India, Australia, whatever you find the most value. So that approach has a lot of upside. I definitely also have some downside that I like to talk about, but it has clearly more upside in the sense that you don't get the average. You can go and pick and choose. If you really believe in that evidence in terms of, you know, how can we historically see which countries perform better based on a, say, CLEP rate rate here. Now, remember that a stock market in a specific country is nothing more than the aggregated valuations. So, So, just like whenever we know that for individual stock picks, if they're priced at an expensive ratio, they won't perform as well. It will be the same for that specific stock market,

Starting point is 00:29:56 since it's just a aggregate of that, and you'll see some mean version because of that. And then I want to say that as you're looking at some of those countries that looks like they're trading at a very attractive level, keep in mind that the risk you take are different than if you invest in Europe or you invest in the US because it's a global reserve currency. Now, that's not the same as saying that you don't have any issues in Europe and the US. We're going to have a segment here later about Europe and we just talked about what's happening in US. There are major problems. But if you look at some of the list of the quote unquote most appealing international countries

Starting point is 00:30:32 like Russia or Turkey, not only will you have a lot of political risk, you will also have a currency risk that those currencies just might go to zero. Like you would see crazy inflation. So that's also one of the reasons why you see a premium. whenever you're looking broadly across all stocks. So I have a different way of looking at international investing. And it's specific to the last 10 years. Before everything changed in 2008,

Starting point is 00:31:00 I would have done exactly kind of the way Stig was describing it. But more recently, my thesis is that central banks are manipulating everything and that they're driving the prices of securities up. So let me give you an example. back in 2015, you had the European Central Bank step in and conduct massive amounts of quantitative easing. They did this from kind of the start of maybe the end of the first quarter of 2015 up until 2018. Well, during that period of time, that same period of time when the ECB was aggressively expanding their balance sheet, they went from like $2.5 trillion on their balance sheet, clear up to,

Starting point is 00:31:44 like 5.7 or somewhere in those ballparks, right? So it was practically a hundred percent expansion of their money supply over that duration of time from 2015 to 2018. So you have to think of it in relative terms to, well, what are all the other central banks in the world doing? Well, in the U.S., the balance sheet, through that same period of time, actually went down. If you pull up the charts and you look at the expansion of the balance sheet on the Fed's part from 2015 to this beginning of 2018 period of time, it went down. It didn't go down by a lot. It went down by a little bit. It was pretty much flat through that whole period of time. So if you're an equity investor during that period of time, where do you want to be? Well, Stan Drunken Miller, I can tell you, I watched an interview with billionaire Stan Drunken Miller back in 2015 time frame. And he said, I just put on a massive position. Europe. And at the time, it didn't make complete sense to me why he was doing that. Today, as I'm looking at it in hindsight, it was brilliant positioning. And he was doing that because he was looking at how these central banks are supplying the liquidity that's causing the bid in

Starting point is 00:32:54 all these assets. So, heck yeah, he was right. Did he outperform everything else relatively speaking in the equity market? Of course he did. So using that same logic, which I think is still valid today because nothing has changed. And I look at where we would see similar performance due to just aggressive expansion of central banks balance sheet in those countries relative to all the other countries in the world. In the U.S., it's insane. So just in 2020, we've gone from $4 trillion to $7 trillion just this year. We've almost done 100% expansion. When you look at the other central banks, they're also expanding, but they're not expanding. expanding nearly as aggressively. So they're up not even close to those numbers, say a quarter to

Starting point is 00:33:43 30 to 40 percent of the easing that you're seeing here in the U.S. So where do I think you're going to see the performance? In relative terms, if I'm comparing it to all these relative markets, I think you're going to see it in the U.S. I think the U.S. is going to be the location that has the highest amount of manipulation and therefore the highest bidding relative to the other spots in the world. Now, this gets really complicated because we're talking about something that is nearly impossible to predict where they're going to ease the hardest next, right? Because this all comes down to policy. This all comes down to, well, which country is going to have to insert more liquidity and more fiat into their system. So from an investing standpoint, I think one of the most

Starting point is 00:34:29 powerful ways to defend your treasury of work is how I look at it. Your treasury of work that you have saved. How do you protect that? I think the best way to protect it is through a momentum approach, momentum investing approach, where you're looking at the price and you're saying, all right, there's a statistical move based on previous volatility. And now I should be an owner. And now there's something that has broken the statistical volatility. To the downside, I should sell it and protect my principle, right? This approach has worked very well for Stig and I in 2020. I would argue we missed a significant portion of the drop based on our TIP momentum tool that provided that for the S&P 500 for any other ETF. And then miraculously, the tool also recommended a

Starting point is 00:35:21 buy shortly after the drop because it saw a statistical change in the volatility coming back to the upside. Would I have thought that that would have happened based on the fundamentals? Heck, no. There's no way. But from a momentum standpoint, it's saying be in the game. So I think that moving forward, central banks are conducting aggressive quantitative easing. I think they're going to continue to do aggressive quantitative easing. Not only are they going to be doing quantitative easing, they're going to be doing universal basic income and they're going to be making payments to pretty much every American and also every other citizen's central bank in the world is doing the same thing. So where does that take the market? I have no idea because at the same time, my expectations

Starting point is 00:36:05 for earnings are going to be atrocious relative to where they were before for a majority of the companies. The five companies that are driving the whole S&P 500, yeah, they're probably not included in that description. But for every other company in the world, yeah, there's a lot. losing business. So how do you navigate this? You, in my opinion, you navigate it through momentum investing. I don't know any other way to do it because this is defense, man. You are not on the offense here. You are playing defense. One final thought I have. I believe that there is a gross misunderstanding for most market participants on something being up in nominal Fiat terms versus something being up in buying power terms.

Starting point is 00:36:53 Okay? So let me explain what I mean by that. So the stock market, if you went and asked 100 people, is the stock market up this year? I think you'd probably have 100 people tell you yes. You might find some crazy weird ball like myself that would tell you it's down. And so now let me explain what I mean by that.

Starting point is 00:37:12 If I go and I measure the value of the S&P 500 in gold since the start of this year, the S&P 500 is down nearly 16%. If I measure the S&P 500 in Bitcoin, the S&P 500 is down negative 35% for this year. I think those trends are going to continue in the future. That's my expectation. And I know we're talking about international stocks here. So let me just tell you if I pull up any other ticker for this year, since the S&P 500 is outperformed internationally for 2020, those numbers for whatever country you want to pick is worse than

Starting point is 00:37:55 negative 15% and worse than negative 35% for whatever country you want to throw at me, right? In gold or Bitcoin terms. That's what I mean when I say that there's a gross misunderstanding between something being up in nominal fiat terms versus something being up in buying power terms. I think very few people understand this. I think most people are extremely skeptical of the idea that I'm talking about. And that's fine. I want people to be skeptical of that idea because that's the only way if you do buy into that idea, you better have some conviction, especially with the volatility

Starting point is 00:38:30 on one of those two things. So the reason I'm bringing this up is because I want people to challenge the way they see the world. I want people to challenge their thinking and dig into this more. dig into this idea of what is buying power, what does nominal prices mean versus buying power prices mean? I think it's probably one of the most important topics of 2020 for people participating in financial markets. I'm very old school. As you know, I'm not too different in the way I look at valuations compared to whenever we started the podcast in 2014. And I know that you are in many ways, and I think it's great we have this discussion. It's probably also a lot interesting that if we always agreed, because that's, I guess that would be boring for people to listen to. I feel that it still comes down to valuation. I do think a lot of valuations have

Starting point is 00:39:23 become harder because of the manipulation. But whereas, you know, I'm just like throwing out some random numbers. Say that, you know, 10 years ago, you could be trusted valuations, you know, explaining 80% of the future returns. It would now be less than that. I think you're right now. It's been distorted by that influx of your currencies and all that that's being printed. If I look at, should I buy an index, let's just look away from currency risk here for a moment in the sense that of exchange rate and who's printing more money, but let's say that I should just look at, you know, the Canadian stock index in the US. Like, would I buy the one that has the most tractive valuation or not?

Starting point is 00:40:08 What do I expect would have the best performance? Everything else equal. right now that would be the Canadian. And so I'm not saying that you cannot or should not include all the other factors, which we also try to do here in the podcast. I think there's a lot of good things to be said about using momentum in the way that you haven't, or we haven't really been doing before and a lot of people have been doing before because of that. But for me, it still comes down to valuation as the one most fundamental factor in terms of determining that. Then you might have a part in the sense that, oh, but stick, the discussion is not about should I buy stock

Starting point is 00:40:43 A or stock B or stock index A or stock index B. It might be should a buy another asset class. I think you have a part about that. To me, that's sort of like a different discussion. It's not a less valid discussion, but it's a different discussion to have. Whenever I'm looking at two stocks, I would be looking at the most attractive valuation. And then to the other thing that you mentioned about central banks, whenever we're throwing out, you know, later we're going to talk about Euro, we're talking about, hey, how many bonds are they going to buy back? The 750 billion euros that ECB is buying back, it's not the same impact as the fat. It's two different markets, it's two different impacts. So any thoughts on that, Preston? Let's take a quick break and hear

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Starting point is 00:44:15 The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. I think it's really important for me to say that for all the people listening and have learned value investing through some of Stigginized conversations, maybe even the Buffett's books videos that I did years ago on YouTube, I believe in all of that stuff. I believe in all of that stuff.

Starting point is 00:45:01 to my core. I would tell you that that's my foundational roots is in that stuff. We're in a very unique environment today. And this environment, and I think the better way for me to describe it is that stuff works. I have complete and utter faith in how value investing works. There's one key thing that value investing requires in order for it to work. And that's a sound currency. That is unshakable. If you have an unsound currency and you're trying to do valuations with a ruler that keeps moving around on you, I don't know that, and especially if you're just looking domestically and you're not looking internationally at all the things that are playing out, I think it gets very difficult to do effectively if you're talking about increasing your buying power. Does it mean it's

Starting point is 00:45:52 obsolete? Of course not. I mean, when I look at TIP finance, I mean, the first thing I go to is the valuation page. The first thing I go to is which company is giving me the most earnings for the price that I'd pay on the market, right? That's the first thing I'm looking at. But I'm also looking at a lot of other factors and I'm pulling them all together. And I think that it's just important for people, especially for young people that are in college right now that are learning about valuations, right? They're learning about discount cash flow models. They're learning about IRA calculations, all those things. Those are very important things. And there's going to be a day when the person who's really good at those things is going to be extremely lethal in the market. I'd tell you the last

Starting point is 00:46:32 five years, they have not been extremely lethal. It's maybe much more momentum-based in order to have been a person who's really outperforming. But I think once we return to some type of sound money, and I have no idea the timeline of when something like that's going to play out, you better darn well believe Preston Pish is going to be the biggest value investor on the planet buying up the picks that are kicking off the biggest cash lows based on the price that I'm paying. But I really think that you have to have a sound money in place in order for that to be such a slam dunk shooting fish in a barrel approach like it was for Warren Buffett for decades. And I think you're starting to see why it isn't shooting fish in a barrel for Warren Buffett

Starting point is 00:47:16 in the last 10 years. You know, at the end of the day, I think I'm just, I'm kind of a chameleon in the way that I approach investing. I'm trying to look at what works. I'm trying to look at all the external factors and I'm trying to adjust it. If I was on a sailboat, I'm adjusting the sale and I'm adjusting the rudder in order to navigate where I want to go. I guess that's all I'm trying to say. But anyway, Stig, let's transition. Let's talk about what's next on our agenda here. We've got European markets, monetary and fiscal policies. Let's do it. So I'm going to come up with a very old school way of valuing Europe right now.

Starting point is 00:47:51 No, I'm just teasing Preston right now. So, whenever I'm looking at European markets, and if we look at the major markets, you know, Germany, UK, and France, they haven't seen the same rebounds in the stock market index as, you know, say, the S&P 500. And so whenever I saw that, to me, it was sort of like a signal to perhaps I should see if there's still some value to be found in Europe. and then talking a bit more about what is happening over here. So let's talk about some of the somewhat comparable thing. You know, the ECB are growing their balance sheet too, like Preston Mince before. What they're saying is that the program is vital to ensure that especially Southern Europe has been hit the hardest by the pandemic, won't see a surge in boring costs.

Starting point is 00:48:41 And we're recording this the 3rd of June. There's going to be a new meeting tomorrow, June 4th, and the rumor saying that they're probably going to expand that program. That is what the market expects. And you've seen that in the European markets here lately, that that's been trying to factor in. And so I think what's interesting for American listeners to understand whenever they learn about Europe is that it's comparable and it's not whenever you look at some of those numbers. You know, one thing we talked about before is that the debt market in Europe is just not as deep. as in the US. So it has a dollar or a euro for that matter would just have a different impact. But it's also because fiscal policies, and whenever I say fiscal policies, as opposed to monetary

Starting point is 00:49:26 policies where you are more controlling the monetary supply, you know, fiscal policies, that's a different way of spending money, if you like. It might be government programs like unemployment programs or fiscal policies can also be taxes. So it's much more directed at the consumers than the financial markets. Now, in Europe, we don't have a central unit as you guys do in the US to determine the fiscal stimulus. We have that in the sense that we have a long-term EU budget, but in the States, you also have something that is state-based and something that's fed-based, but it's structured

Starting point is 00:50:04 very differently in Europe due to historical reasons because we are still very independent nations. And so what the EU has been trying to do, and this is not the... the Eurozone, but the EU, just to clarify that, it's two very different things. Many of the countries are the same, but definitely not all of them, is that the German Chancellor Merkel and the French President Macron has proposed a 500 billion euro recovery package. And there are a few interesting things about that. The first one is that it's not a lot of money.

Starting point is 00:50:37 And so what do I mean by that? 500 billion euros, that should be a lot of money. But it's not because fiscal policies are a lot more comparable between the US and Europe in the sense that it goes directly to the consumers and so the death of the market are not different. Actually, Europe and the US has a similar size economy. So it's a lot more comparable. 500 billion euros is not a lot whenever you compare to what has been happening in the US and how much it's been stimulated there. So that's one thing. The individual member states can still print.

Starting point is 00:51:11 But it's a trickier situation because if you look at the EU as such, because we have the construction that we have, all 27 countries have to agree. I know that sounds ridiculous. You have something where the richer Northern European countries are supposed to pay for the poorer Southern European countries. Whenever you have something when 27 countries have to agree, you're just bound to run into problems, which is also what you're seeing now. So right now, the southern European countries are saying, hey, guys, you have to help us.

Starting point is 00:51:45 The northern European countries who are typically wealthy are saying we're not going to bail you out. Because this won't be a loan. This would be made as a grand. So it would be money raised all over Europe, but distributed to the poorer countries, which a lot of countries are against. And since you have to have 27 countries agree on this, it's just very difficult. So that just tells you something about the inefficiencies of the European market. Now, what are the implications then for us investors?

Starting point is 00:52:14 Like how are we supposed to deal with those facts that I brought up before? Well, despite all of this, I would still say that if you're too exposed in the US, you might consider diversifying into Europe. It is everything else equal, training, and a much more attractive level. Southern Europe probably doesn't seem like the place you want to put your money. Some of that has already been priced in. But also, if you buy a European ETAF, for instance, Vanguard's EuroBTF VGK, that's the ticker VGK, you would only be 9% exposed to Spain, Italy and Portugal.

Starting point is 00:52:49 Like those financial markets are not as developed. So if you feel bad about investing in Europe because of what you're seeing there, typically they won't be too exposed to that. Now, I don't expect a double-digit return for Europe going into this. or if I do see a double-dict return for euro, it would be very nominal numbers because of what we're seeing now. But I think the downside protection compared to other equities, for instance, in the emerging markets are much higher, giving Euro's status as currency. And I think it's also a nice way of diversifying into another currency. If you are very concerned about the future of the US dollar, it might make sense for you to diversify into some of the other major currencies.

Starting point is 00:53:34 So the other thing I want to say about Europe, not trying to sell investing in Europe too much here, but is that if you want to invest in Europe, you can clearly do that many different ways. The easiest way, the most transparent way, I would like to say also, would probably be to buy something like a VJK, like a market-weighted index for Europe, which is trading at around a 6% expect to return. The US is closer to, what, three or four? I think the US is close to like three and a half. Another way you can invest in Europe, which is something I don't recommend, is that popular

Starting point is 00:54:11 way very often suggested in the media is the index called Eurostocks 50, which is a collection of the 50 biggest and most liquid stocks. And so just based on knowing that, it seems like, oh, why wouldn't I just invest in the biggest better these days? So it seems, looking at the fan stocks, why wouldn't I do that with Europe? The index is still 40% down from the peak more than 20 years ago, which is interesting in itself. But I think it's also important to understand some of the component of the legal framework here in Europe.

Starting point is 00:54:42 We are entering a world with more and more winner-takes-all, technologies and industries, and Europe just doesn't have the same whole field advantage as US companies. The reason why I say that is that European regulators are much happier than the US, or for that matter, Asian counterparts to start antitrust cases. And that just implies that it's much harder for European companies to compete with big tech in, say, your 10 cents, Alibaba, Google, Apple. And so, which is just one of their multiple reasons why the Eurostock 50 haven't been performing that well, but it is very difficult to compete for European companies. You're just one example. Last week I pitched Spotify. They've been suing Apple in Europe

Starting point is 00:55:30 for discriminating them on the iOS platform, and Apple are using the monopoly power to do that. Now, the weird thing is that Android is actually much bigger than iOS here in Europe, so you would think that while they're specifically targeting Apple, that's because they can. It's much more difficult than them to target in the US. Like, they're not Apple. They don't have that monopoly power. So they're doing in Europe because they can, not because that is what they want to do the most. So one thing is what the lack of antitrust means for us as consumers, but for investors,

Starting point is 00:56:03 US companies just have a leg up. Because if you have a legislation that allows you to have more monopoly power, that also allows you to have more profitability, which is essentially what you're going after being an investor. So that was some of the pros and cons of potentially diversifying away from the US into Europe. All right. So for this being our 300th episode, we want to do something. something special. So we have a forum on our website. Anybody can participate on the forum if you want to

Starting point is 00:56:32 ask questions about stock picks, if you want to talk about whatever. We're on there and we interact with the audience there. And what we want to do is for the top 10 people on our forum, and this is measured by the number of engagements they've had on the platform, those top 10 people, we're going to give you a lifetime subscription to TIP finance. You're going to be able to use it into perpetuity. The TIP finance has the momentum tool that we were talking about earlier on the show. It also does a stock filter where it looks at every single company on the U.S. markets, and it prioritizes them based on Warren Buffett-type value filtering. And so we're just excited to be able to give this to everybody completely for free for their entire lifetimes.

Starting point is 00:57:14 And if anyone else wants to check it out, go ahead and go to our website or you can just go into Google and type TIP finance and conduct a search. It'll be the first thing that pops up. thank you to everybody in our audience. Thank you, thank you for listening to our show, to supporting us, for engaging with us online. We just feel so blessed. Stig and I, I mean, we just enjoy doing this. We would do this if no one was listening to us, to be quite honest with you. We just enjoyed these conversations. I mean, that's the thing. If only people heard about what we rambled about the financial markets before we hit that record button. And can I say

Starting point is 00:57:52 especially fun here now that we're starting to look a bit differently at it. We came in in 2014, very much being like, Warren Buffett being the Oracle. I think we still think he's the Oracle, but like, I wouldn't say it was boring in a way because we sure had a lot of fun, but it was very much like, we are, yeah, we got this. We read the gospel. This is the truth. It's obvious that we're learning right there with you. I think that's probably the best way to put It is we're learning all this stuff right there with you. It's not that we have this knowledge or anything. I mean, when we interview the Jeff Booths of the world and when we read whatever book

Starting point is 00:58:31 and we come on the show and we talk about it, we're right there with you learning this stuff. And I think the exciting part is I feel like there's still so much more to cover and so much more to learn on this topic. So I look forward to another 300. I'm just going to put it out there. Stig behind the scenes is the guy really running this thing. I mean, he is the guy that manages the day to day with the whole team.

Starting point is 00:58:59 And, I mean, he is one hell of a partner. That's all I can say. So thank you, Stig. You're definitely too kind. I'm desperately trying to come up with something other than, thank you for telling me to buy Bitcoin. I really need to come up with something more difficult than that president. Because he shouldn't just all be dollars and cents.

Starting point is 00:59:19 but I think I want to put it like this. It's fantastic to have a good job, but it's much better to have a good job whenever you're doing with people you admire, respect, and love. So let me round off the episode by saying that. And let's just forget the whole Bitcoin comment. Likewise. All right, guys.

Starting point is 00:59:39 That was all the press that I had for episode 300 of the investors' podcast. We'll be back with episode 301 next week. stay safe.

We Study Billionaires - The Investor’s Podcast Network - TIP300: Current Market Conditions w/ Preston and Stig (Business Podcast)

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