We Study Billionaires - The Investor’s Podcast Network - TIP327: COVID-19, Vaccine, and the US Economy - w/ Ed Harrison (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's episode, Stig and I speak with Ed Harrison, who's the editor at Real Vision TV. Today, we cover the accelerating debt situation across the globe and the opportunities and constraints for investors. We'll also cover the continued mass of money printing and the impact on the economy, not only as investors, but as citizens. So without further delay, we bring you our discussion with Ed Harrison. You are listening to The Investors Podcast, where we study the financial markets and

Starting point is 00:00:33 read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey guys, before we jump into the interview, I wanted to explain a new structure we have on the podcast. Preston and I have gotten a lot of comments about how this show has weird off value investing because we tend to discuss Bitcoin lately. But because we value your opinion and we'd also like to stay true to the concept of we studied billionaires, we have decided to start a new series within the we study billionaires feed called Bitcoin Fundamental. So, apart from the regular episodes, we release every Saturday, you can now expect new episodes that are dedicated to Bitcoin every Wednesday.

Starting point is 00:01:20 As you all know, Preston has been very passionate about Bitcoin, so he'll be hosting the new Bitcoin Fundamental show, and he already has an amazing lineup of guests in store for you. So again, Wednesday episodes are solo for Bitcoin discussion, where Saturday episodes will remain the same. To help you distinguish between the two, we also label the episode titles differently. All Bitcoin episodes are labeled BTC instead of TIP. For instance, this episode is labeled TIP 327, and the Bitcoin episode last Wednesday is BTC3.

Starting point is 00:01:54 If you're listening to this on Spotify, you should see the regular red artwork while those on Bitcoin are all orange. This distinction has yet to be reflected on Apple Podcast, but Apple is already working on fixing this soon. Now, we are aware that Bitcoin is not everybody's cup of tea. So for those who are not interested, we completely understand if you skip the Wednesday episodes and listen only to the Saturday once. Also understand if it's the other way around. In any case, we hope that by having this new system in place, Preston and I are able to help more people and really hope this clarifies things.

Starting point is 00:02:26 Thank you for the continued support, guys. Let's jump into the episode with Ed Harrison. Welcome to The Investors podcast. I'm your host, Dick Bordersson, and today I'm here with my co-hoax, Preston Pesh. And this episode is going to be a fun one because we have the always insightful Ed Harrison with us here today. Ed, thank you so much for joining Preston and me here in today's podcast. Very good to talk to you, as always, yes. Last time you were on our podcast, that was in early September, and we talked about how the economy and the stock market would react to a quote-unquote medical bailout, in other words, a vaccine.

Starting point is 00:03:03 Now, we're recording this year in early December, and it looks like that in this month, an estimated 20 million people in the U.S. alone, and millions of Europeans would have received the vaccine already. How have you positioned yourself accordingly? What are your thoughts on that medical bailout? Yeah, I think that the market is in the process of looking through the long, dark winter, as people are calling it, where we have a decent number of deaths and COVID infections. there's going to be some shakeout as a result of that, two, the other side of that. So there are two things that are happening. One, I would say that there's going to be the rotation into value over growth, which has already begun. The S&P Small Cap had its best month ever in November. Even the Dow had its best month since January, 1987. Global indices had their best month in November since 1988. So all of those are huge numbers.

Starting point is 00:04:03 and they're in the back of what people are saying, look, we know that bad things are going to happen over the short term, but over the long term, now we know that COVID is not going to be a terrible thing for three, four, five years down the line. We have vaccines already in place that will get rid of it. The problem, of course, is that there are some companies, they won't make the grade, that they're so close to the precipice now that this long, cold winter, is going to be. be difficult for them to survive. And so in places like retail, in places like hospitality, we're going to see some fallout and there's going to be differentiation there. So the market in general may be able to continue higher, but there will be some negatives there. So, Ed, you said that the IMF has forecasted that the public debt to GDP ratio of advanced economies would rise from 105% in 2019 to 132% by 2021. How will we as citizens experience the increased debt burden and what is the implications

Starting point is 00:05:08 for the world economy? Yeah, I think that's a good question because it was interesting that I saw a piece by Ambrose Evans Pritchard of the Telegraph earlier today. He was writing about the problems within the Eurozone. And I think that's a good place to concentrate when you think about what's, happening with regard to the debt situation, the public debt in particular, though I think private debt is generally the biggest problem that you have to worry about. The reason that I talk about the Eurozone is because when you think about debt, you think about the government because they

Starting point is 00:05:42 have the ability to tax as having more wherewithal from a debt situation than private debtors. You know, a private debtor, if bad things happen, it has to get revenue. And it, you know, it has to get customers to give it revenue or it has to get income if it's a person. And that's difficult to do. The government can just raise taxes. There's a limit to what they can do in terms of revenue, but they have a lot more wherewithal as a result of that. Unfortunately, however, the Eurozone doesn't have the exact same level of degrees of freedom just because of the way that it's structured. That is, you have the European Central Bank on the one hand.

Starting point is 00:06:24 And then you have all of the individual countries, on the other hand, which are at a lower level. So there's a disparity in terms of the centralized European Central Bank and then the individual member states. And just to give you a sense of what I'm talking about, this is what Evans Pritchard says. He says that Germany, their public debt jumped over 11 points to 71% of GDP over the last year. So, you know, the Maastricht Treaty had a 60% hurdle. Germany had been under that hurdle. They jumped up from 60 to 71 percent, so they're slightly over the hurdle. But, you know, it's not that big a deal. But then when you start looking at the other numbers, especially in Southern Europe, the numbers start to balloon up. An example, 116 percent for France,

Starting point is 00:07:11 120 percent for Spain, 135 percent for Portugal, 160 percent for Italy, and a massive 201 percent for Greece. These aren't numbers that are perspective. These are numbers that are actually already existing. And when you add in all of the turmoil that we're having in this long, cold winter again, those numbers are going to be even higher. So the question becomes, what happens on the other side? When you get the vaccine, when you get the medical bailout, are you going to get the financial bailout to go along with it?

Starting point is 00:07:46 And the answer for these particular economies is no. No, they will get the medical bailout. by the time that comes, the debt levels will be so high that it's going to be a problem. So Europe is where I would look first and foremost for those debt problems to rear their head. You talk about private debt and you talk about public debt. And it's very important to make that distinction. You know, very often you just say debt, but all debt are not created equal. First and foremost, with regard to public and private debt, is where your revenues come from.

Starting point is 00:08:18 And the second is also what kind of currency you're using. So I think with regard to the revenue sources, if you think about private debt, that is debt that's held that is issued by or that is owed by private entities, whether those are companies or individuals. So if you take out a mortgage in your home, you have to pay that mortgage back. That's a debt that you have. In order to pay that back, you need to have revenue. And that revenue comes from income streams that are available to you. Mostly, for most people, it's their work. For companies, revenue streams are from debt. business that they do. And they're beholden to their customers. They're beholden to making a salary in order to meet those payments. If you don't have a job or if your customer is abandoning you because it's a recession, then those debts become more burdensome to you. And there's no way out of it.

Starting point is 00:09:11 Basically, there might be a point at which you default. Government, on the other hand, they have a much bigger cudgel. That is as if the debts aren't due, what happens is if they can't make the debts because of their revenue, they can just raise taxes. They can always increase their revenue stream up to a certain point. There is obviously, you know, you can't get a blood out of a stone, but you can tax people more and more at some point and get money as a result of that. The second part of that, I would say that's the most important is the currency that you're using. So in the United States, in Denmark, in the UK, you are what are called currency issuers. That is, is that the currency is issued by the government.

Starting point is 00:09:58 Effectively, the government can print as many Danish cron, as many UK pounds, or as many US dollars as they want in order to make good on their debts. Effectively, the government debt is an IOU. That is, is that what you're saying is, is like, I know that you can actually make good by taxing. So I'm actually just going to take an IOU from you knowing that it's the taxing authority and you won't abuse your position with me. I'm going to take this fiat money from you as if it's actually something that you're not going to abuse. The Eurozone doesn't have that same opportunity. They gave up that when they created the Euro. The euro is something that is mutually secured and is issued by the ECB.

Starting point is 00:10:48 It's not as if the Bank of Italy or the Bundesbank or any of the others can just bring a bunch of euro. The Fed has the back of the U.S. treasury. We see that now, you know, with regard to quantitative easing and other things, etc. There's only so far that the ECB can go. So the likes of Italy, you know, they're going to be in big. trouble once the pandemic emergency conditions are over and they're caught with 170% debt to GDP. Let's focus on the US here for a bit. Let's talk about the public debt for the US. It has exceeded

Starting point is 00:11:25 136% already. And now with COVID, it's just been growing rapidly. And you could even say it was growing rapidly before COVID. Paying down debt with current account surplus just seems unrealistic at this stage. Which other options does the U.S. have available? The option that the U.S. has available in terms of the debt is to not pay it down, to grow out of the problem, or to have inflation erode the debt. The U.K., when it went into World War II, it decided, you know what, look, this is an existential crisis. We're fighting the Nazis. We need to create armaments and have our soldiers ready and prepared to fight the Germans. We'll do whatever it takes. And they did that. And by the time that the war was over, they had 250% debt to GDP. This is under the Bretton Wood system, which was a modified gold standard. So ostensibly, you know, that's hard money. Yet, they were able to continue to pay their debts through both currency depreciation and through inflation all the way until today without a default. They did have in 1976 a currency crisis where they went to the IMF.

Starting point is 00:12:37 But other than that, which was 30 years after the war, they were able to successfully deal with a mountain of debt, 250% debt to GDP, and do so successfully over decades. So the United States, that's to me the likely outcome. That is a combination of growth, inflation, currency depreciation will make it so that that debt load as a percentage of GDP is lower 10, 20, 30 years down the line. What's interesting is that at least in the short term, we could see a pop in terms of growth coming back to levels that are better than the so-called secular stagnation that we've seen, you know, because lower for longer in terms of interest rates is a result of the fact

Starting point is 00:13:27 that real growth has been very poor in the United States and elsewhere. So think 2% instead of 3% or 4%. The country I would look at as an example of how that works over time. Let's say if you had 3 or 4% would be Belgium. I'm looking right now as we're speaking at Trading Economics website on Belgium. And over the period from 1995 until the year, say, 2008, there was no period there except one year, the year 2000, that Belgium's GDP increased by more than 5%. During that entire period, their GDP level was below the 5% per annum level. Yet, when you take a look at the exact same

Starting point is 00:14:19 chart from 1995 to 2008, their debt to GDP went down from 131% debt to GDP. That's about equivalent to where the U.S. is right now. now where you said 136, down to 87.3%. And so that's obviously above what the Maastricht Treaty is, but they continued to go up after the sovereign debt crisis to 107 and then ended the year 2019 at 98.6. 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 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

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Starting point is 00:18:55 That's Shopify.com. slash W.S.B. All right. Back to the show. So, Ed, in the latest earnings call, J.P. Morgan Chase CEO, Jamie Diamond, was openly reflected on the potential double-dip recession. Could you please take us through some of those scenarios? Yeah, I think that the scenario is a combination of what's happening, both on the consumer

Starting point is 00:19:22 level as a result of the coronavirus and also in terms of the fiscal level. And that's where potentially the two come together. So let me put it this way, that the United States, we've had three waves of the coronavirus. We had the first wave which gave us the shutdown, which was fairly global. GDP really went down hard across the globe. Everyone reopened in the spring to the summer, but the United States had a second wave of coronavirus infections. And that wave was concentrated in the south. We saw some modest falls in economic growth there, but it wasn't a widespread national wave. And so overall, even despite the rollback and the reopening, we were able to continue to grow at really high rates. Now we're in the middle of a third wave, which started

Starting point is 00:20:18 probably in the late October, mid-October timeframe. And the numbers are starting to rival what they were in the first wave, except it's not as concentrated. But the numbers are high enough that, you know, we're talking to 100,000 people almost hospitalized across the United States, that we're getting to health care system overload in many different places. And that has precipitated a number of shutdowns, rollbacks of the economy. And that's what's causing a degree of growth to roll over. The more we get these shutdowns, the more you have the hospitalization causing overload of the health care system, the higher the probability that that rolls over into a near recession or recession territory. And then when you add to that, the fiscal

Starting point is 00:21:12 side, then there's an even greater risk there. On December 11th, we have the potential for a government shutdown if a new budget isn't agreed to. We also have two other deadlines. I believe it's the 26th for pandemic unemployment assistance to be re-opted, and then December the 31st for the eviction moratorium to be halted. So there are a number of so-called fiscal cliffs coming forward, which could have enough of a shock to the economy, both psychologically and also in terms of just absolute dollars being spent into the private sector, that it would take us over the edge, even if the shutdowns and the consumer behavior from the wave of coronavirus didn't do that. So Jamie Diamond, I think he's totally right when he says there is a risk of a double dip. In fact,

Starting point is 00:22:05 I would consider double dip to be my base case, given where we are right now. So when I say base, you know, 40 to 50% probability, if not more, that we see GDP roll over into negative territory. With interest rates around 0%, fiscal policy seems more important than ever in the current climate that we're in. Jen and Yellen looks like she will be the Biden administration's Treasury Secretary. Which implications does that have for us as investors? Yeah, I think that it means that the Fed and the Treasury can work hand in global. as long as obviously the Congress allows the Treasury to have a free hand. It all depends, obviously, on what the composition of the Senate is and also how amenable the Senate is to the executive

Starting point is 00:22:54 branch doing the things that they want to do. But Janet Yellen being a old hand in Washington, someone who is vice chairman and then later chairman of the Federal Reserve Board, someone who knows everyone at the Fed who has a personal relationship with Jay Powell, who's now the Federal Reserve Chairman, she can work really well and effectively with the Fed. She can also work with a lot of the other people in the administration who she knows from her time as the Fed chair and also in Congress because they know who she is based upon her testimony when she was a Fed person. She's well positioned to be effective if the United States is still an effective democracy. That is if there's not gridlock and the U.S. is not unable to get

Starting point is 00:23:40 things done just purely because we've broken down as a democracy, then Janet Yellen would be well placed to get those things done. So that bodes well. What I would say, the known unknown is how well Congress will receive her. How well will they allow her to do her job? And we already know the shot across the bow actually comes from the outgoing Treasury Secretary, Stephen Mnuchin, who's already tied Yellen's hands in certain regard. And he's also tried to tie. Jay Powell's hands. So they're going to have to re-up what was happening in 2020. And if Congress doesn't want them to re-up, they have a bit of a problem. It was interesting, you said there that the Fed and the Treasury could potentially work well together. So if we look back at the great financial

Starting point is 00:24:31 crisis, you could definitely talk about a corporation at that point in time. They did a lot of things together and did it very, very fast. Could you talk to us about, like, what does it look like whenever those two entities work together well? And what does it look like when they don't? One way to think about it is that the Federal Reserve or the Central Bank in general is the government's bank. That is that they're doing a role that the government allows them to do. So when we talk about the Federal Reserve buying mortgage-backed securities or buying treasury bonds. That's because the government has said we've established a central bank as an independent agency and we give them authorization to do those types of transactions.

Starting point is 00:25:18 Now, in exigent circumstances, the government could say, wait a minute, you know what, you guys aren't doing what we want you to do. We're going to revoke your role. We're going to step in and do your role for you because you are actually using money that are just IOUs, of the government. These are government IOUs. You're our agent. You're not actually an independent actor. The only reason that you're independent is because it makes people understand that we're not going to abuse our power to print money and to credit accounts. But if we wanted to, we could take that power away. So when you think of it from that perspective, you're thinking there's a consolidated government balance sheet of the central bank and the government

Starting point is 00:26:05 together with the central bank acting as the government agent in this case. And so if they were to act in concert with one another more so, that would be a situation in which now their independence where they're saying, wait a minute, it's important that we maintain our distance from you because people are skeptical if we work hand in glove that you're not going to debase the currency. Now we're in a crisis, so we're going to forego that independence and we're going to work hand in glove with you. That's what we did when we did quantitative easing. That's what we did when we did Operation Twist. That's a situation in which the central bank and the government are working hand in glove. A situation where they're not, I think, is perfectly reasonable to see in Europe.

Starting point is 00:26:54 When, for instance, in Europe, before Mario Draghi said, we'll do whatever it takes, really, they weren't going to do whatever it takes. Right. They allowed spreads to widen, Spain, Portugal, Ireland, even Italy went over the brink. In fact, the reason that Spain, Italy, or Spain, Ireland, and Portugal received bailouts and Greece as well was because they weren't big enough. Italy didn't receive a bailout, and the reason that Mario Draghi intervened isn't just because he's Italian, is because Italy's too big to fail. It's the largest market for government bonds in Europe. There's no way that you could have Italy in trouble in the same way without it being an existential problem for the euro system. But that was a

Starting point is 00:27:40 perfect example of the central bank and the government not working hand and glove leading to disastrous consequences. Ed, talk to us about where you think we are in the credit cycle and how macro and micro investors should position themselves accordingly. Yeah, that's a tricky one because I think that we're late cycle, but there are a lot of people who are thinking that we're early cycle. I mean, And the way to think about it is the March event, that is the correction that we had in March, was that correction and then that contraction in the GDP, was that the end of a cycle? Or was it just a correction in the way that, you know, 1987 was a correction? Because if you think of it as a end of cycle event from a credit perspective, and then you're off to the races,

Starting point is 00:28:30 both in credit markets and equity markets, you're starting from a, you're starting from a, incredibly high level from a price earnings ratio. You know, you're starting from the bottom at a level that is beyond the top of some previous cycles. To me, that would suggest that actually it was just a correction. It was a, what you would call a crash in the way that 1987 was a crash, and that actually the cycle will end sometime later, and that multiples will be lower than they are today. So that's my sort of, how can you say, my philosophical belief. But the proof is in the pudding in terms of what's happening, because we were just talking about the potential for a vaccine and then the rotation into value, and then the market being off to the race as a result of that and potentially

Starting point is 00:29:24 pent up demand, high levels of GDP growth for at least the near term. In March, you had a huge dislocation in the markets, not just equities, but credit. And in credit markets, because there's less liquidity, you had a gaping down in prices that was probably worse and more severe liquidity crunch than you had in the equity space. And as a result of that, you had prices that were attractive in residential mortgage-backed securities, in particular because there was a lot of credit support, both from in the United States, the GSEs, that's the government-sponsored entities, Fannie Mae and Freddie Mac, and also from government in terms of putting money in people's pockets, pandemic unemployment assistance, unemployment claims instead of 26 weeks worth, 39 weeks worth. So all those things were helpful in terms of

Starting point is 00:30:18 making sure that instead of having 10% in terms of forbearance, you only have three or four percent in terms of mortgage forbearance. And that market is actually a functioning market doing relatively well. So you can say then the credit event, the end-of-cycle credit event for residential mortgage-backed securities was March. And now, once we get over this little hump with regard to the winter, the residential mortgage-backed security market is in relatively good shape. But commercial mortgage-backed securities, that's a whole different ballgame. We're talking to the residential mortgage-backed security market. We're We're talking offices. We're talking hotels. We're talking things that are not coming back, ever. Some of these hotels are going to close. Some of these office buildings are never going to have full occupancy. And so the end of cycle is still in front of us. If you take that same paradigm and you switch that over into equities, then you have the exact same things that are going on. There are still some credits that are out there whose equities are trading at levels that are above zero, but they're going to go to zero. But then there are others

Starting point is 00:31:33 where there's the rotation into value over growth that are going to really benefit over the longer term. So I would say that this value over growth paradigm, especially if you look at specific sectors, that's something to look at. Is it fully priced in? Because obviously value the price earnings ratios are lower than they are with growth. I would say that there's going to be. be a convergence. You know, the likes of Apple, the likes of Amazon, Apple trading it 40 times earnings, 45 times earnings, is that, you know, with relatively paltry growth and also a very large capitalization, is that actually a good bet versus a chemical company or a consumer goods company? I think that I might make the translation into rotating into these cyclical, these value-oriented

Starting point is 00:32:26 stocks. It's no secret whenever I say that we've seen massive central bank asset purchase, not only in the States, but also around the world. And these purchases have been conducted through a mixture of primary and secondary market purchase, asset bank securities covered bonds and private and exchange traded funds. Now, countries have been doing this differently. The U.S. is mainly chosen the path of secondary markets. Could you please talk to us about the advantages and the disadvantages of the U.S. approach

Starting point is 00:32:59 and why the U.S. had chosen that route compared to the alternative? I think, you know, the obvious advantage to not buying up lots of securities is price discovery. Because as soon as you have someone a large actor with unlimited balance sheet, which effectively the Fed has, they can just credit accounts and create money out of thin air, intervening in the market. in a large way, it's hard to know what the market is telling you. Supposedly, prices are a signal. They're telling you whether to buy or sell, whether that market is over or undervalue. But when you have an actor like the central bank getting into those markets, then that price signal goes away. And then it distorts what people are doing with their capital. So capital

Starting point is 00:33:47 allocation gets abused. And we see that in the United States and elsewhere. So the less that you're able to do that, the better it is. I think that there's an emerging consensus among a lot of people, for instance, despite the massive intervention over years and years in Japan, and they're buying ETFs in Japan, that Japanese shares are undervalued, that now is a good time to get in. And they're doing more intervention than the Fed in certain ways. I mean, their balance sheet as a percentage of GDP is enormous. So I don't know if it necessarily translates into action. at one specific time. What I would say is that Japan is later in the cycle than we are. You know, they're coming out of a 30-year period post-1989 of dealing with a debt overhang

Starting point is 00:34:35 and using central bank intervention to deal with that. The United States has only been dealing with that since 2008. So that's 12 years. So if you could say on a relative basis, as a result of how long the central bank's been intervening, maybe that's actually where the rubber hits the road. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI powered platform. So whether you're prepping for a SOC or running an enterprise GRC program, VANTA keeps you secure and keeps your

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Starting point is 00:38:09 the income fund fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. So, Ed, how in the world do we as investors position ourselves to take advantage of the debt situation in the most developed nations? Yeah, I think really it's a question of what our nation's force to do to keep that debt level from rising more. And generally speaking, what that is is to, going back to our earlier discussion, thinking about growth and in the absence of real growth,

Starting point is 00:38:44 inflation and currency depreciation. And obviously what that really means is financial repression if you can't get growth. And financial repression is basically negative interest rates on a real basis. So I may be earning 2% on my bonds, but inflation is 3%. Or I may be earning 1% on my bonds, but inflation is 2%. So I'm getting a negative return after inflation. Gold, silver, even Bitcoin, they look pretty good compared to that. Now, gold, you don't earn a return on that asset. But when real returns are negative, obviously, it makes a lot of sense to get nothing and to have a store of value than to be penalized for actually holding things and getting a negative return. And we know from Europe, Denmark,

Starting point is 00:39:33 Sweden, Switzerland, and the Eurozone, interest rates are negative right across the board. And so not even on a real basis, but on a fundamental basis, you're getting a negative return. You're guaranteed to lose money when you buy the instruments, government bonds. That's a situation in which other stores of value will do well and potentially commodities, hard assets in general. Ed, we had your colleague, Rowe Paul, on our podcast, and we talked to him about inflation. And one of the things he said was, look, whenever we talk about inflation, let's just just remember that there's no such thing as a common metric because we each have our own index. If you're like, we don't have our own CPI index, you know, your consumption is different than my

Starting point is 00:40:19 consumption. Now, we can definitely talk about inflated asset prices. Should that be a part of, say, your personal index or the common investor's personal index? Or is it just a different ballgame if you have assets because they're not consumed the same way as other goods are? How do you see that whole idea about money printing, inflated assets, and then into that discussion about inflation. What's the relationship there? That's a hard one. I think that without getting into the technical aspects of it, immediately my thought goes to the two-price system that Hyman Minsky came up with, that you have the one system which is about goods and services, which is basically a cost plus type of model. That is, it costs this much to. It costs us this much to.

Starting point is 00:41:08 to create these goods and services. We're going to mark it up and then we're going to sell it on to you. Whereas in the asset model, it's really about prospective earnings that those assets can throw off. And that's a completely different animal and you have to separate them out to a certain degree. Where those two markets collide in the most difficult way is in home values, because homes can be an asset or they can be a cost in terms of everyone is renting or in the United States we have renters equivalent. It's like I own the home, but what's the equivalent price that I would actually pay if I were to rent my home back to myself? That's a calculation that's made and that's part of the CPI. And I think that that's probably a good way to think about it in terms of

Starting point is 00:41:58 separating it out that, okay, yes, we have the asset side of the portfolio. So when the central banks are printing all this money, some of that money goes to asset prices, or actually much of it goes to asset prices, art, real estate, financial assets like gold and silver and stocks and bonds. But then there's a completely different side of things. I'm renting the house back to myself and I'm buying up goods and services that I need to live on and maintain my family. And those two only intersect in that little narrow space in terms of owners' equivalent rent. So let's talk more about money printing. Audiences might be sitting out there thinking, oh my God, they talk about this money printing every single weekend. Can't come up with something

Starting point is 00:42:47 new, but it is just so interesting. So guys, please forgive us. Ed and I are just geeking it out here. The moment that the central bank prints money, it doesn't create. or destroy any value. And that might sound a bit surprising. We have Dow Jones here 30,000, and it might just all sound a little confusing because we all heard that you print money and then asset price is just skyrocket, right? But the money printing is technically a loan between two entities. And it could be the Fed and the government.

Starting point is 00:43:16 It doesn't have to be, but it could be those two entities. And that creates an asset and a liability. And so they even each other out. So there's no wealth destruction or creation as such. But using the money printing here in 2020 as an example, do you think that the Fed has effectively created or destroyed wealth long term for the economy? In other words, what's the first order and then second order derivative of what's happening right now? So I think that it's about asset price signal distortion. And, you know, the Austrians,

Starting point is 00:43:47 the Austrian economics is a good example of this. If you think about Keynesian economics, a lot of times we talk about aggregates. You know, aggregate demand is a big thing. Austrian economics, people talk about time value of money. That is, is that things that have value over the longer term when interest rates are low and when central banks are buying up assets, those things tend to be relatively more richly valued because money is cheaper. And as a result, the time value of money is lower. That means I can hold on to this money for a longer period of time. And when I get my return 10 years down the line, it's almost as good as a return five years down the line. Whereas when money is more expensive, getting my money 10 years down the

Starting point is 00:44:34 line isn't anywhere close to as good as getting my money five years down the line. So when we think about it mechanically in terms of what the central bank does, the central bank, as you said, it creates an asset and liability. What I'm going to do with that $1 billion? Well, I'm going to go and buy an asset. What asset can I buy? I'll buy a financial asset, mortgage-backed security, I'll buy a government bond. Once they buy that government bond, usually from a bank, that bank then transforms from having had a asset, which was a government bond or mortgage-backed security, to having reserves. And so those reserves either sit idle at the central bank, or the bank goes and utilizes it and buys something else.

Starting point is 00:45:19 That's where the asset price inflation happens. That's where the distortion happens because that bank doesn't want to sit around. Just imagine that I'm a bank and let's say I have a balance sheet of $100 billion. And over time, a billion here, a billion there, the central bank buys off my assets. Those assets, let's say they were spinning off 50 basis points of 0.5% of interest. to me. Now, I have reserves of $100 billion, just sitting there doing nothing. What am I going to do? Well, I'm going to use that $100 billion. I'm going to buy other assets so that I can get a return to my money. The distortion goes mechanically from the central bank buying assets off of the banks,

Starting point is 00:46:03 and then the banks moving into next best markets from where they were originally. So going from mortgage-backed securities and government bonds to, say, corporate bonds or junk bonds or equities. And that bids up the prices in those next markets as well. So, Ed, we see China and the U.S. continue to decouple. This is the classic example of rival powers. Just to mention a few examples. The U.S. has made it more complicated for the Chinese companies to be listed in the U.S., and China has invested heavily in eventually being self-sufficient with energy and semi-eastern.

Starting point is 00:46:42 conductors, how can I as an investor take advantage of this increasing decoupling? It's a good question. I think that the way that I would answer the question is that it seems to me the obvious outgrowth of the decoupling over time is that China is going to form its own ecosystem of countries that are around it so that those are reliable. trade patterns, where the United States used to be a trade pattern. People talked about Chimerica. That's no longer so that they maybe have a more regionally based trade relationship with other countries. And those countries, they can trade in their own currencies. The upshot of that is that the U.S. dollar comes less important for those countries. And probably that's in Asia in

Starting point is 00:47:37 particular. So to the degree that the U.S. dollar is less important from a capital account perspective, that would suggest that the United States capital account surplus that people, because they want to get dollars, will become less than it was before, which means the current account deficit will become less as well. Interestingly, I would imagine that that means a weaker U.S. dollar over time and a stronger yuan, stronger Asian currencies that are tied to the yuan in that trade relationship. And therefore, to the degree that you still have strong growth in those markets, you also therefore have stronger equity valuations, whether you're valuing them domestically or in foreign currency. You get the foreign currency appreciation if you're not doing it

Starting point is 00:48:29 domestically. One thing to think about, too, I think in terms of these currencies, is that they also, a lot of times have had U.S. dollar liabilities. If they're creating trade in bilateral relationships and they don't need the U.S. dollars, maybe they don't need U.S. dollar liabilities as well. So that's also a locus of problems that they no longer have. If you think about the 1998 Asian financial crisis. Maybe that crisis doesn't happen because that was actually as much a dollar problem as it was a debt problem, you know, a liquidity crisis as much as a solvency crisis. So to me, that says that emerging Asia X China could be attractive in that relationship. So that's how I would play that as a long-term play.

Starting point is 00:49:20 These tensions are between the U.S. and China right now and the continued decoupling that you we're hitting on that before yet. Where does that leave Europe? Because I can't help by thinking about it. There was this famous quote by this European politician who said that whenever goods cross-border soldiers do not. In a way, you know, we feel we should protect ourselves, but it's also important that we keep working together. And so you have like these US superpower and China arguably a rising superpower, if not already. And then you have Europe in the middle, like the old world. What's happening with Europe?

Starting point is 00:49:58 They'll have to choose which side they're going to go on. I mean, if you think about it, you can divvy up the world into North America, Europe, Asia. You can talk about Africa, South America, and then maybe you have a few sort of floaters like Russia, Turkey. You know, there's Australia, New Zealand. Where are they going to attach themselves over time? You know, Australia, they've attached themselves to the Chinese from a trade perspective. much more so than, say, 20, 25 years ago. If there's a decoupling with the United States,

Starting point is 00:50:29 then I think Australia will end up choosing the U.S. over China, and that's going to be a painful process to decouple themselves from that relationship. Europe, they have the same problem. Where do they choose their battles? I think that they're going to be much more aligned with the U.S. just from a pure economic and social perspective, governance perspective. There's a natural synergy between the West as, let's say, embodied by Germany. Think of Germany as the equivalent of the United States and the likes of, say, Poland,

Starting point is 00:51:04 or even Bulgaria, Romania, Hungary, as similar to Mexico or to Central America for the United States. There's a potential regional deepening there that you could have where there's a symbiotic relationship. And I think that if you can overcome the political barriers, you can get there. And that's the more natural fit for Europe over time. Well, I can only say once again, it's been absolutely amazing having you on the show. I mean, we always learn so much whenever we have you here. So first of all, thank you for that. And we would definitely like to give you the opportunity to tell the audience more about where they can learn about create write down. real vision, and more about you?

Starting point is 00:51:51 First, let me say thank you as well. And you know, you asked the best questions. It takes me to the edge of my wheelhouse, if you will. I'm looking outside the wheelhouse, but still within it, which is, you know, kudos to you on being able to do that. In terms of where people can find me, Real Vision, definitely first and foremost, they can see me doing lots of interviews on that video interviews,

Starting point is 00:52:14 but also credit write downs, which is pro.creditwritredounds.com. That's my newsletter, maybe once a month, something like that. You can get a free article, but usually everything's behind the paywall. Fantastic. We'll definitely make sure to link to all of that. Thank you so much for your time. We already look forward to bring you on back again 2021. Yeah, I'm looking forward to it as well.

Starting point is 00:52:40 Have a safe and happy end of the year and happy New Year as well. All right, guys, so as we're letting Ed go, I just wanted to stress once again that on Wednesdays, we have Bitcoin episodes coming out, Preston is the only host. On Saturdays, it's slightly different. Sometimes Preston will co-host the show. Other times, like next Saturday, it will be with Tray. And we won't mention Bitcoin with a single word. And of course, if this is something you are interested in, we have a brand new episode every Wednesday when it's all about that. All right, guys, take care. Thank you for your time. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only.

Starting point is 00:53:23 Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP327: COVID-19, Vaccine, and the US Economy - w/ Ed Harrison (Business Podcast)

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