We Study Billionaires - The Investor’s Podcast Network - TIP533: How the Fed went Broke w/ Lyn Alden

Starting point is 00:00:00 You're listening to TIP. In this episode, I invited back investment expert Lynn Alton. Today we discuss how the Fed went broke and analyze the Fed's balance sheet. We then transitioned into discussion of how to build a portfolio in a challenging macro environment and whether we should optimize for happiness in the process. Lynn Alton is always a wealth of knowledge and I hope you'll enjoy the conversation as much as we did. 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 00:00:48 Welcome to The Investors Podcast. I'm your host, Dick Broterson, and I'm here with Lynn Alden. You just know you're going to be in good company whenever Lynn is here. Lynn, how are you doing today? I appreciate that. I'm doing good. Happy to be here. Fantastic. You're always more than welcome. As we chat about just before we started the show, this is the 11th time that you're on our show, And this is episode 533. I mean, can you believe it? So I don't want to do the numbers, but I don't know, two percentage. Sounds about right.

Starting point is 00:01:15 That's the view on the show. So I hope we can increase that percentage as we go along. It's always a lot of fun whenever you're here. I really appreciate that. A big fan of your show and multiple of the different shows your network does. I think that's one of the best parts about it is like the broad set of perspectives. Well, thank you for saying so, then. And let's just jump right into it.

Starting point is 00:01:35 Today, I would like to talk about how the Fed went broke. But before we do, and perhaps to sort of like create a foundation for everyone, perhaps we can zoom out. And if I can ask you to explain what is on the assets and liability side on the Fed balance sheet, then perhaps we can talk about how that is similar to how a commercial bank running their balance sheet. Sure. So basically, in a lot of regards, the Fed is very similar to a commercial bank.

Starting point is 00:02:01 I mean, there are very important exceptions where it's not. But in terms of the over-arching details, it's actually pretty similar. So if you look at a commercial bank for a second, they have assets and liabilities. The assets exceed the liabilities, that's an important part of their solvency, and their assets generally pay higher interest rates than their liabilities. The purpose of a bank is to borrow money at cheap rates and lend money with a little bit more risk and a little bit more duration at higher rates, as well as collecting fees and things like that along the way. And so for a typical bank, their liabilities are mainly their deposits. So

Starting point is 00:02:35 basically, when you deposit money in a bank, that's your asset, it's their liability. And interest rates, they're generally pretty low. On the bank asset side, depending on the type of bank it is, they do mortgages, they do business loans, they do credit card lending, they do all sorts of different types of lending. And those are ones that are generally a little bit riskier, higher duration, but they pay higher interest rates, and so they can absorb some small percentage of defaults, build positive capital, pay dividends, fund their operations, and maintain positive equity and positive capital. When you look at a central bank, it's very similar, but there's a couple different categories

Starting point is 00:03:12 for their assets and liabilities. So their liabilities are, one, banknotes. So physical cash and circulation is a liability of that country's central bank, and those are obviously zero percent yielding assets, right? if you hold a dollar bill or a physical euro, you're not getting paid interest on this. So that's obviously already a good start for them, right? They have zero percent liabilities there. But they have other liabilities that, for example, consists of bank reserves. So much like how we deposit money at a bank and that's our asset and their liability, banks have to deposit their

Starting point is 00:03:44 cash, their spare cash at the central bank. And that's an asset for the bank and it's a liability for the central bank. And just like how a bank pays interest, a central bank also in many environments does pay interest on those reserves. And the reason they do that is because it's an important part of how they manage their short-term interest rates. It basically presents a floor. If you can put reserves in the central bank and get, say, 5% interest on it, there's no reason why you would lend to anyone else at below 5% because you're just taking out more risk and for less return. And so that's one of their important policy tools. And then there are other liabilities they can do like reverse repos and things like that, they get more complex, and some of those do pay interest. So that's the central

Starting point is 00:04:29 bank's liability side. On the asset side, it actually looks pretty similar to a commercial bank. They have things like treasuries, you know, the government debt of whatever country they operate in. So those pay interest. They also often have mortgage-backed securities, right? So they have mortgage exposure. Obviously, these deals would differ around the world, but for example, a Federal Reserve has a lot of mortgage-backed securities. These also pay interest. And then in some countries, they'll have things like corporate debt or they'll have things like equities. Those are generally considered less traditional types of assets for central banks to hold, but you see some like Japan kind of going that route. And sometimes like the Fed and others will do that temporarily during crisis,

Starting point is 00:05:05 things like corporate debt. And in most contexts, the Federal Reserve's assets are bigger than their liabilities and they pay higher interest rate than their liabilities. And it will then differ from jurisdictions, but usually the central banks operate at like utility where it has to pay its excess profits back to the government. It doesn't just keep building capital like a commercial bank would, although in some jurisdictions, you can publicly hold shares of a central bank, and they will, you know, they could pay dividends. They could do things like that. But if we look at the Federal Reserve, so it's not publicly held, but it is held by banks. They basically pay a small dividend to their owners. They pay their operating expenses. And then they have to send the rest of their

Starting point is 00:05:47 profits back to the Treasury. Right. And so it's actually a source of income for the Treasury. and it kind of makes it so that any sort of treasuries held by the Fed are effectively interest-free because they are paying interest on them, but a lot of these profits are just getting sent right back to the Treasury. The challenge in recent months, really ever since September, is that the Federal Reserve increased interest rates so quickly and so significantly. And for the first time, they got above the prior cycles high in terms of interest rates, or at least, you know, the first time in decades. We've had this kind of declining trend of lower highs in terms of interest rates, but they actually got way above that. And so they're actually, their liabilities pay higher interest rates than their

Starting point is 00:06:25 assets. And so obviously their banknotes are still paying zero, but their other areas, their bank reserves and their reverse repos in the Fed's case, are paying a higher interest rate than their treasuries and their mortgage-backed securities that in many cases are a longer duration, they're fixed rate. They're not adjusting upwards. They hold them from years ago. And so they have a mismatch. And so one is they're no longer profitable. They're not sending any more remittances to the treasury. And two, if they were a normal commercial bank, they'd be on the verge of bankruptcy. So they're months away from having negative tangible equity, which is any normal bank would be bankrupt. But because of the central bank, that's where they have a very big difference. They basically get to just put a

Starting point is 00:07:05 placeholder there that kind of is like an IOU. And so in the future, if they're ever profitable again, then before sending more money to the treasury, they get to pay themselves back. So basically, they're losing money. They're going in towards negative tangible equity. but they're filling that negative equity gap with IOUs on their future income, which of course for any private entity would be red flags over the place, absolute catastrophe. You wouldn't touch it with a 10-foot pole, but it's different if you're the central bank. So, Lynn, I really like that you talked about this. I think a lot of people, they're not even thinking in the first place about Fed being profitable

Starting point is 00:07:42 or not. You know, that's probably not how they see the Fed in the first place. But from January 2011 until December 22, the Fed, the Fed, Fed paid approximately a trillion dollars in cumulative remittances to the U.S. Treasury. And these are the payments you referred to before. They're not flowing anymore. Now, the listener might be concerned, or perhaps the listener is not concerned at all? They might say, why is that a big deal? Can't the U.S. Treasury not just borrow the difference? Like, we hear all about this, all the debt. Why not a bit more debt? Yeah, it's a good set of questions. And there's a

Starting point is 00:08:13 couple avenues to approach on. One, we can talk about why a central bank should be profitable, and then we can go into the second question. So the main reason you want a central bank to be profitable is that you want them to be independent, or at least as independent as they can be. The worst case scenario is to have a central bank that's completely beholden to the central government of that country, because if that's the case, they can do things like call the central bank head and tell him to cut interest rates six weeks before election, for example. You can get very, very manipulated very quickly if the government actually controls the central bank, controls the price of money for the entire economy, can do all sorts of things like that. And so for that reason,

Starting point is 00:08:50 most central banks are designed to be somewhat independent in the sense that they're not completely independent, but they, so they're governed by laws and their leaders are often appointed by the country's Congress, Parliament leaders in various ways, but with terms that are pretty long and that are hard to dismiss so the president can't just call them up and tell them to do something. And part of what maintains some degree of credible independence is that the central bank is not financed by the government, right? Because if you have independent terms and things like that, but the government can just shut off your funding, unless you do something, then you're not independent. And independence is a limited concept in the sense that it goes away during war, pretty much.

Starting point is 00:09:29 It goes away during absolute crises. But on a normal operating basis, election cycles, things like that, it is supposed to be pretty independent. So maintaining positive equity, maintaining some of your profitability is important for a central bank's independence. If they have deeply negative equity, if they're operating on massive losses, that becomes a problem. And so that's one where it's relevant when you start to see a central bank with negative tangible equity and kind of no path towards profitability in the foreseeable future. That's a challenge. Number two is that in this world of rising deficits, some of these things that were kind of desensitized to, right? So for example, the U.S. Treasury just lost a $100 billion revenue source per year from the Fed. And we're like, well,

Starting point is 00:10:10 I mean, we're talking about trillions now. Who cares about $100 billion? But for context, that's about four times the size of NASA's budget. If you heard that the government's going to four times the size of NASA's budget, there are a lot of people that would be like, oh, no, we can't. That's what? Are we just going to keep spending now? We're just going to keep, you know, doing this. Whereas the other side, we just lost a revenue source that's four times NASA's budget.

Starting point is 00:10:30 So that's, you know, a hundred billion more treasury debt that has to be issued each year, all else being equal. So that's number one. And number two is the fact that, so the past 40 years, we've had in many developed countries rising debt to GDPs at the public level, but it's all set by declining interest rates. And so the interest servicing costs, especially as a percentage of GDP, has not been rising. In many cases, it's been falling or flat. And the problem that we now face is that we have, you know, we hit zero or even slightly negative in many countries. Now we kind of bounced off

Starting point is 00:11:01 zero. Now we're kind of sideways up while deficit is still being accrued, debt is still being accumulated, and so we're paying higher interest on higher debt, and that's where you risk a fiscal spiral. I think the, I mean, a good analogy is the European sovereign debt crisis when you had is basically people no longer trusted the fiscal solvency of many southern European countries. Their interest rates exploded, and if unaddressed, that would just spiral into a, you know, a fiscal default, essentially. And so that could also happen in other countries, but the difference being that they have more levers they can pull internally to finance their own government deficits.

Starting point is 00:11:38 I hear a lot of people talking about how central bankers should be elected, like in any good democracy. And I don't know if it's because I'm sitting in the echo chamber that I'm hearing that. I don't know if that's always been in the case. And I think that we have this idea that democracy is good and if it's out of democracy, it's bad. And I don't want to be quoted on that because I also think democracy is good. But there are just some things that's probably not good if it's surely democratic.

Starting point is 00:12:06 like the Fed. So imagine that, you know, you had, there had two different candidates to be fed chair and one saying we should high interest rate and one onset the opposite. And it was the population who had to elect, you know, the new chair. Who would the population elect? Like, that in itself is just an interesting thought. And, you know, I can't help but like make the comparison to the question about if you ask people, do you want to be a millionaire? Everyone would say yes. But if you ask them like, why do you want to be a millionaire, they're going to say things like, oh, I'm going to buy a new car, a bigger house, a boat, which is ironically the very opposite of being a millionaire.

Starting point is 00:12:43 And I kind of feel like the idea of having a democratic elected central bank might give you the opposite of what you want as much as we can baste the central bank in its current form. That's not what I'm trying to say at all. So anyway, I just wanted to bring that point of view into the debate here. Yeah, one of the interesting, basically if you had elected central bankers, especially on kind of the same term cycle as other political leaders. You generally have a lot of agreement between the central banker and the government. And so you probably would give the government more control over the price of money and generally financing. In the United States, for example,

Starting point is 00:13:17 we have the Supreme Court. They're not elected, but they're appointed by the people we do elect. And they have, well, they have indefinite terms, which is kind of a debate in its own sake. But either way, their terms are much longer than other ones. And generally, you don't want to see outright political comments from a Supreme Court justice, even though the court at times does become very politicized. And it's kind of the same thing with central bank. You expect political comments out of your president. You expect political comments out of your, like, you know, your Congress, your parliament, but generally in a lot of countries, you kind of, the society and the government is structured around where you don't really want to hear political comments out of your Supreme Court justices

Starting point is 00:13:54 or your central bankers. They're kind of meant to be a different type of political leader in a way, even though they still are political leaders. And so in some ways, it's like an illusion, but it is somewhat of an important illusion. And it does have some tangible effects. I mean, right now, for example, Jerome Powell, I mean, last I checked, he's registered Republican, for example, under a Democratic president. But even when Trump was in charge, Trump was criticizing Powell for raising rates, and because we do have some degree of independence. I mean, you know, Powell is basically not subservient to any president. He can't just be fired. He's not part of the executive branch. And that is important.

Starting point is 00:14:30 And it's harder to have his funding source pulled if the central bank is a profitable institution. And in order the government can override the central bank, they can change the laws that they operate with. But in divided government, that's hard to do. Right. So the president can't do that unilaterally. It takes a pretty big consensus of government to do that.

Starting point is 00:14:49 And so central bank independence is kind of a spectrum, right? And, you know, what you would call quote unquote banana republic. It's generally, you know, when you see like massive deficits, people say, oh, that's banana republic stuff. And it's like, well, because you're generally talking about jurisdictions that don't have these strong institutions that are some degree of separate and kind of balancing each other out, whereas in the United States and a number of other developed countries, you at least have some degree of central bank independence. But it does start to erode at times of crisis or war, which has also been a big theme of my macro research that I do think in general, this is an era of

Starting point is 00:15:21 much closer interaction between the central bank and the treasury because the central banks get override it in many other ways. Basically, one of their mandate is financial stability. And sometimes the government can mess stuff so bad that the central bank has to do things they prefer not to do in order to maintain basically like a void sovereign default or keep markets, liquid, things like that. And they become heavily politicized. And so this is, you know, that's why I keep comparing the 2020s to the 1940s, which is not a great analogy. And I hope that obviously certain things are very, very different than 1940s, but in a lot of macroeconomic ways, it actually is kind of similar. Very much. And we talked about this. I want to say it was the last episode we had. I'll make sure to

Starting point is 00:16:04 link to that in the show notes. It's a very interesting observation that you made in comparing today with the 1940s, unfortunately. I want to talk to you about your wonderful blog post, how the Fed went broke. And in that blog post, you stayed, by the end of this decade, I have considerable concerns regarding a financial spiral occurring in the United States and other developed countries, meaning that a combination of high deficits, high debt, and high interest rates on those debts will all work together to create structural inflation and money supply growth. Now, a lot to unpack with that statement. But first, perhaps, Len, if you could paint some color around, what do you mean by structural

Starting point is 00:16:45 inflation and money supply growth? And then perhaps we can sort of like unfold based on that. Yeah, so basically money supply growth is heavily correlated with inflation, especially on a persistent basis, not like a year-of-year basis, but I'd say rolling five-year periods. Money supply growth and price inflation are pretty heavily correlated. And money supply growth can come from one of two main avenues. One is bank lending, right? So as banks lend more, they increase the money multiplier, they lend more deposits into existence.

Starting point is 00:17:15 That's one form of money creation. And the other one is very large fiscal deficit. especially when they're monetized by either the central bank or the commercial banking system. And those are the two avenues for how a lot of money can be created. So, for example, the 1910s, 1940s, and recently, due to the whole pandemic stimulus, those periods of rapid money creation were mainly fiscally driven money creation. Whereas the 1970s that everyone thinks of when they hear about inflation, that was, in many cases there was fiscal deficits, but they were smaller.

Starting point is 00:17:47 And instead, you had peak bank lending. And a lot of that was because you had peak demographics, right? So the baby boomer generation was entering their home buying years, their peak consumption years for like a, you know, a 20 year period. And that was a very big environment for bank lending, especially in developed countries. And so that's kind of the two avenues when thinking about. And during the 80s, in order to try to quell that bank lending, Paul Volcker raised interest rates super high. And then, you know, basically those rates stayed pretty high even after him for quite a lot. a while, and he started to get much higher debt to GDP. So from the 1940s to the 1970s and the United States and many other countries, you had declining debt to GDP. A lot of that was financial oppression, so interest rates were below the prevailing inflation rate, about half the time. Basically, you had nominal GDP kind of catch up to the debt in many cases. But either way, you had declining debt to GDP. But starting in the early 80s, in the U.S. and many other countries, you had rising debt to GDP, which became pretty structural. And so by the end of the

Starting point is 00:18:48 you had a lot of concerns around the debt in interest servicing. And so, for example, the famous like U.S. national debt clock in New York was installed in the late 1980s. And, you know, we had, we had Ross Pro in the in the early 90s run as an independent political candidate, one of the most successful political, independent political candidates in history. Like, he actually had a meaningful percentage of the vote, which is normally just Republican or Democrat, and he ran on a platform of basically the debt's a problem. Right. So that whole period was kind of a crescendo. and people getting very concerned about debts and interest on the debt. But the punchline is that they were way early. So basically right after that kind of crescendo, you had a period of 1990s,

Starting point is 00:19:30 so booming economy, peak demographics in terms of workforce participation. So the United States had the highest ever labor participation by the late 90s, early 2000s. We actually had a brief budget surplus. You had declining interest rates. So even though debt to GDP is pretty high, you had falling interest servicing costs. And then, of course, you had the 2000s and then you had the 2010s, basically as big banking bust, disinflationary period, things like that. The challenge now is that here in the 2020s, some of those things are those people that were concerned about in the late 80s and the early 90s are actually started to manifest just way later than they thought, because we had to get through that period of peak demographics. We had to get through that period of declining

Starting point is 00:20:11 interest rates. And now you have a period of very large fiscal deficits, you know, many countries is above 100% debt of GDP and industries that are no longer declining and don't really have anywhere to decline to, you know, below zero, for example, much below zero. And so they're kind of in a period where they're stuck. You have, you know, high debts, high deficits and high interest on that. And a lot of that's tied to demographics and entitlement spending. So it's not like a war that can just go away suddenly. It's kind of projected out into the 30s. It's going to keep compounding. And so by the end of this decade, I think that's going to be a meaningful problem. I think the combination of, I think deficits are actually going to be a problem in developed

Starting point is 00:20:51 countries really for the first time since the 1940s. And that this is going to be a macroeconomic trend to be aware of for investors. And it's also going to, I think, add to, you know, basically political polarization, turbulence, things like that because in those such environments, things like interest rates become politicized because you're kind of out of control there. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:25:15 That's Shopify. com slash WSB. All right. Back to the show. So could we try and dig a bit more into this, what you said there at the endland? So if things indeed unfold the way that you describe, which implications would have for us as citizens? And then perhaps the second part of that question would be, what should we do as investors to position against what may or may not happen here?

Starting point is 00:25:42 If you have inflation caused by bank lending, the correct answer for central banks is to raise rates, try to slow down that bank lending, harden the money, get the positive real rates, discourage kind of excessive bank lending. If you have inflation caused by rapid fiscal spending, then really it's pretty hard to get inflation down until you stop that excessive fiscal spending, which is what happens after war is over, for example, but because this one's entitlement driven, it's really not ending any time soon, but it's very unlikely to be restructured in many countries. So the implications is that you have very, very large structural fiscal deficits. And if you flip that around conceptually,

Starting point is 00:26:19 basically the deficits of our government are a surplus for the private sector, which sounds good at first. In fact, many MMT advocates kind of refer to like that positively, but in inflationary terms, that's also true, right? So, for example, if they're running 10% of GDP deficits year after year after year, that's actually money creation is kind of pouring into the private sector, especially at times where the central bank is monetizing those fiscal deficits. And so you end up having above average money supply growth, not necessarily every year, but on a, you know, a rolling five-year basis. And that is likely to transit into higher prices, especially if you have other things like, you know, constraints on commodity supplies, basically, you know, tight

Starting point is 00:27:00 supply demand spreads among commodities and infrastructure and that sort of thing, as well as labor demographics. And so that ends up being a rather inflationary cycle. And it's one where ironically, raising industry rates can exacerbate the inflation because it actually increases the deficits that governments are pouring into the private sector. So raising rates will squeeze the private sector. But if they're not the ones primarily causing the deficit and causing the money creation, then those higher rates can actually result in even more. more inflation. And so they are stuck in a rock between a hard place because if you raise rates too high over a long enough time frame, you're exacerbating fiscal driven inflation and deficits.

Starting point is 00:27:41 But then if they try to do financial pressure, they go to low industry rates despite that, then it encourages speculative attacks on the currency. Basically, everyone should borrow currency and buy harder assets with it, which creates more money and therefore exacerbates inflation. And so they try to stop that as well. And they often turn to capital controls and things like that. So from an investor perspective, there are going to be times like, say, you know, last year, perhaps parts of this year where you want to own safe paper assets, things like, you know, T bills, cash.

Starting point is 00:28:11 But over the course of a decade, those are likely to lose purchasing power on a structural basis. And that instead you probably want to be in generally harder assets on average, things like bodies, infrastructure, certain types of value stocks. Basically, that's an environment or generally value stocks do outperform growth stocks more often than not. Gold, Bitcoin, potentially emerging markets, you know, countries that don't have those high debt problems, but that, you know, have other tailwinds associated with them, I think can do pretty well. And so you generally want to be in things that didn't do well in the 2010s decade and instead generally did better and say the 2000s decade.

Starting point is 00:28:50 That's kind of the environment you want to be at least maybe not all in on, but that your portfolio is kind of shifted towards if you think that thesis is correct. I generally like India and Brazil for a very different reason, and they're not without risks. So I do, you know, you have to position sizes carefully. India has very strong demographics, very good structural growth. They still have low household debt relative to GDP compared to many other countries. So they're still actually underbanked, underfinancialized in many cases.

Starting point is 00:29:19 So I'm pretty bullish structural in India and just large Indian banks on, say, a five-year basis. Brazil is a instead – so India is kind of like a gross story, whereas Brazil is more like a value story. So during periods of strong dollar and weak commodities, Brazil often enters depression-like conditions. So this happened in the 80s. It happened to some extent in the late 90s. And really, ever since 2014, ever since we had the end of period of QE, we had kind of a stronger dollar. We had oil come off of its like, you know, $100 plus barrel pure that it was in back then. Brazil's been in this kind of depression-like condition. But if we do get a very strong, you know, kind of commodities decade, I do think that Brazil can do pretty well. They currently have positive real rates. They jacked interest rates up super high to try to get ahead of Fed tightening. And so they actually have positive real rates. And so their equities are very cheap. There's obviously political turbulence. There is tail risk associated with that. But I think as an appropriately society, position, I think that's another way to kind of play on the fact that the U.S. is going to have

Starting point is 00:30:23 these kind of out of control of fiscal deficits for 5, 10, 15 years into the future. Brazil is actually in a little bit better shape in that regard and might actually stand a benefit. And so there's select emerging markets like that that I like to combine with there's other types of value stocks and commodities and kind of alternative monies, things like that. Yeah, it's very interesting that you should mention that. Having a lot of U.S.-based friends, a lot of them, whenever they talk about diversification, they talk about, let's say, have these properties in these five different states, and now I want to diversify, so now I'm buying the SEP 500, and saying, oh, that's U.S. stocks, but you know,

Starting point is 00:31:01 we also have international exposure because by definition, a lot of these U.S. stocks, like, say Apple, they have more revenue abroad than domestically. Do you think it's still too U.S. centric? I think it's generally too U.S.centric. I think having commodity exposure, even if you stick with U.S. companies or just commodities in general, can balance some of that out. Because during the past kind of four-decade period, bonds were the kind of the main offset to equities. I think going forward in this type of environment, commodities could be somewhat of the offset. Basically, if commodities are going down, central banks are able to kind of, you know, get more doveish.

Starting point is 00:31:37 That's generally good for equities. On other hand, if commodities are soaring, central banks are likely to freak out. more hawkish and that can really quell equities. You know, not necessarily in any sort of given three-month period, but I think that's a general trend to be aware of that these higher input costs can really benefit certain sectors and hurt some of these other sectors. I do think that commodities are a way to diversify somewhat without actually going into international markets, but I do think international markets can add another dimension of diversification. If you look at most metrics right now, there's so much global capital

Starting point is 00:32:09 stuffed into U.S. markets. We've really had a perfect storm to encourage that. over the past decade. And so we kind of saw this in the late 90s as well, early 2000s, just like tons of global capital is all stuffed into U.S. markets. And that can be a pretty painful unwind over, say, a five, 10-year period if you get to that point. And so I do have concerns about, you know, you could have a period where the S&P 500 goes sideways, especially in inflation-adjusted terms. Same thing for many types of U.S. real estate. You could go sideways for five years, 10 years in inflation and adjusted terms, while certain sectors or certain foreign markets or certain kind of global assets outperform on like a, you know, that they outperform

Starting point is 00:32:52 that kind of sideways price action. Len, I want to talk about a bit about money creation. We previously talked about money creation here together with you on the podcast and the role commercial bank system plays in that. We also from time to time hear this chatter about central bank discurances, not just in the US, but in Europe, China, other places too, which depending on how it's set off course, but the intention could be to replace the current process for money creation. I actually wanted to go into this topic from a slightly different angle.

Starting point is 00:33:23 And I don't know if I could call it a more pragmatic approach. Do you think that the commercial bank lobby will ever allow the money creation process to happen outside of their system? Like, how can we think about that to arise, I guess? So I think in countries with strong banking systems like the United States, you're likely to see them kind of shift their power towards the central bank and towards the government in terms of money creation. And you generally see that reflected in the political leaders. Like for example, Jerome Powell's kind of been dismissive of a CBDC. You know, it's like it's all, you know, they're researching it. They're looking into it, but they're not rushing into it in the way that some other countries are. You also had Neil Kashkari kind of, you know, from the Fed more directly kind of asked like what the point of a a CBDC is, kind of talk about how certain contexts you don't really need it. And so I do think that's going to be a trend in the United States and certain other countries. I think the UK will be similar in that regard. Some countries that have more centralized politics might have a better

Starting point is 00:34:16 chance of getting a CBDC push through. And then there's also a spectrum, right? So a CBDDC doesn't, on its own, mean that it takes away from the banking system. Like there were recent headlines where UK talked about having a limit on how much you could save in the CBDC. And the reason, So the reason they would consider something like that is if you're a saver and you want to hold cash, if you hold cash in a bank, you know, you're subject to loss, especially if you're above the, you know, in the U.S., the FDIC limit, other countries have different limits. If you're above the limit or you're worried that the limit won't be honored because they have that they actually have to print money if there's a big banking crisis.

Starting point is 00:34:55 Like the FDIC only holds like, say, 1% of the deposit's worth of insurance, right? So if people, for whatever reason, have a non-zero risk assessment of banks, they'd rather hold money directly with the central bank, right? Because they're like, well, I mean, that's a lower risk threshold. So if you're a saver, why wouldn't you pick the central bank? And so you basically, if you don't want to suck all the deposits out of the bank system into the central bank, you would generally need either lower interest rates or you need limits on how much can be put there per person. And so if a central bank, digital currency, is primarily just trying to replace cash, right, which in many cases they are, then they want to have it treated like cash where you don't hoard large amounts of it, that you have small amounts of it, but that large amounts are stored in banks or government debt or, you know, other types of assets. And so to the extent that a CBDC is used to mostly just replace cash but not bank deposits, that is, I think, something that a lot of countries are interested in, even ones with pretty strong bank lobbies. And they would just make sure that there are limits on that.

Starting point is 00:36:00 Whereas countries that have more command control style politics are potentially interested in having a more expansive CBDC. From a user perspective, the big risk with central bank just occurs is that you lose out on privacy. So physical cash is a private medium of exchange. It's also something where, I mean, it's like no one can shut off your cash, right? It's like they can shut off your credit card, but they can't shut off your cash. And so in a CBDC, it basically gives policymakers more surveillance capabilities, more kind of control capabilities for public spending, corporate spending, gives them better options to kind of control the types of spending or resource flow that happens. And so from a user perspective, that's one of the key risks there. Whereas from a banking system perspective, I think their main goal is limited so that the CBDC is not more heavily used than physical cashes.

Starting point is 00:36:49 I wanted to talk a bit more about digital currencies. This was related to something Redalia said on CNBC here not too long ago. There's always like this dance between Dalio and Sorkin whenever they speak to each other. I don't know if you ever watch any of that, but it's one of those like, Delio gets asked a question. He really wants, you know, to explain and like paint his thesis. Sorkin continues to try to interrupt him and come up with some kind of like headline. Redalue bullish on Bitcoin or what?

Starting point is 00:37:19 whatever is, he can try to catch them on. And every time, like, Delio takes like three steps back and like, oh, but here's the overall framework and let me dive into these eight steps one by one, which is just like a terrible format for CNBC. But anyways, he previously said this on CNBC before he was cut off. I should say, if you want a digital currency, you have to do things differently. I don't think stable coins are good because you're just getting another fiat currency. What would be best is an inflation-linked coin.

Starting point is 00:37:50 So that was the end of the quote. What are your thoughts on Delio's statement and how would an inflation-linked coin work in practice? Inflation is, if you say money creation, right? It's an increase in the money supply. If you use it in modern context, consumer price increases, right? And it's due to, in part, more money entering the system. And there's already official inflation hedges, things like short-term. treasure inflation, protected securities, things like that. So they're already those in the Fiat system.

Starting point is 00:38:22 The problem with having any sort of digital currency that's linked to something like that is that you need a price oracle. So basically that the network now becomes reliant on some sort of external source of information. So if you had some sort of token that, for example, adjusted price based on CPI data, the question is, okay, where is it getting a CPI data, who's controlling it, who can change the algorithm, how that works, things like that. Something like Bitcoin is designed to be entirely self-referential, right? So basically, there's a network. It's backed up by proof of work. It's not looking out to an external price or a goal. It's just Bitcoin, for better or worse, sometimes worse, Bitcoin is what a Bitcoin is. Whereas something like stable coins or other asset-backed tokens, some sort of central issuer holds collateral. Like with stable coins, let's say they, for example, they hold treasuries. They might hold commercial paper or bank deposits, other things like that. They're issuing liabilities. They represent claims for. those, redeemable claims for those. You can also have gold back stable coins. You could have commodity back stable coins. That's another way of having somewhat of an inflation linked token of

Starting point is 00:39:26 some sort if people would want it. So there are ways to make these digital assets that are in some way inflation back, but they're really not that much different than the kind of inflation hedges we already have. And at the end of the day, they're centralized. There's a custodian or price oracle or some sort of governance aspect that is managing that system. And it doesn't really solve anything other that the system doesn't solve now, other than perhaps making it more accessible. One of the use cases of stable coins, for example, is that if you're in Argentina and you're dealing with near hyperinflation, quite but almost, might as well be, 100% inflation, if you get cash, right, you can hold it physically, which is dangerous. You can also deposit

Starting point is 00:40:05 your banks, but Argentina has a history of saying, oh, we have a dollar shortage. We have to go take those dollars and give you pesos in return at the exchange rate that we decided is. So that's a risk. So what a lot of Argentinians do, for example, examples, they will buy stable coins and they know it's centralized, or at least if they know they're buying, they know it's a centralized product. But the central hub is not in Argentina, right? And so anyone with a smartphone and internet connection can go buy a stable coin, they can get dollar exposure and just bypass Argentinian banks or physical cash. And that can be true for Lebanon. That can be true for many other Turkey, for many countries that are experiencing

Starting point is 00:40:39 high inflation, hyperinflation, that kind of thing. You also see it in places like Nigeria. So that is serving a use case to a lot of people. And similarly, I mean, if you're a middle class Nigerian and you want to buy the SMB 500, it's just hard to do so. If you could tokenize it or something, right, you can make it accessible to more people in the world so that they can access it on a smartphone rather than go through this kind of more legacy or kind of complex financial arrangement. But obviously such approaches have regulatory challenges as well as some technical challenges.

Starting point is 00:41:09 So I think that the more people overthink what a approach, digital money is, they're more likely to be disappointed just because anything that you can think of that's complex is ultimately centralized. You're linking back to something. And while it may have certain kind of improvements in the tech rails and who can access it and things like that, it's still not at the end of the day fundamentally different than what we have. I think you're definitely right that simplicity is key. I was reading this series of articles in the economists probably over the past few months. And there were these talks about how Argentina and Brazil would form a union together in like monetary union.

Starting point is 00:41:46 The first time I read it was like, this must be some type of April's full type thing. And they continued with another article and apparently it wasn't possible and they wanted to go to go back and then like link it with Argentinean commodities. And it just seems like a big mess that seemed so unstable. And I know this was sort of like a, if you sort of like knew the answer, to this, you would probably have called someone already, but like whenever you have a system, like you have in Argentina, I know that's one of the countries we typically take up because of all the things that have been all the past few decades. Is that really about money? I know

Starting point is 00:42:24 it sounds crazy whenever I'm saying that, but is that a money problem? Is it an institution problem? Like IMF often were going to say, well, it's about like building institutions. And is that even possible? I don't know if you even buy the premise for this. I have this intellectual exercise of can I come up with a good financial system for Argentina? And so far, the answer is definitely no. What are your thoughts on how to build a system in Argentina? So at the end of the day, institutions and money are tied together. So a country's money is essentially that country's public ledger.

Starting point is 00:42:55 And when that ledger is very mismanaged on a structural basis, you're getting problems with money. And so you can't really fix the money until you fix the institutions. It's hard to fix the institutions while you have bad money. And so really nothing short of like a wholesale realignment in terms of domestic politics, people's understanding of money, politicians getting incentives aligned with the longer term could fix it. It's very hard to fix it once you have that kind of spiral in place.

Starting point is 00:43:19 Things that have to get bad enough that people just go with a very different approach. The challenge with the IMF is that kind of based around just perpetuating the current system. I mean, if you look at a lot of these countries, they've had like over a dozen IMF loans. And it's like that quote, like insanity is trying the same thing over and expect different results. There's so many countries in the world that have just, you look at the list of IMF loans and it's just over and over and over and over again. And I think part of that, I mean, part of that is because of those countries' policies, but it's also, I think, partially from the IMF. Basically, it's like not allowing bankruptcy. It just, you never allow

Starting point is 00:43:51 the system to kind of reset. You just keep restructuring loans, rolling loans over. And then another thing is that the IMF, in order for countries to take the loans, the IMF gives them certain economic prescriptions. They say, okay, you have to do this and this. The funny thing is those are very different than what domestic countries do, developed countries do in recessions. So what does the US do when you have recession? Well, we print a lot of money. We bail everyone out. We often cut taxes. When emerging markets have recessions, the IMF comes in and says, okay, we'll give you a loan, but you have to do austerity. You have to raise taxes. You have to cut spending, especially on things like health care and education. You have to restrict credit to your like domestic

Starting point is 00:44:29 businesses, but also allow the opening for multinational corporations to come in and buy assets on fire sale prices, optimize your exports conveniently for developed countries. And so there have been pretty reasonable criticisms that it's kind of this neocolonial policy almost, where you kind of come in and just keep telling them how to restructure their economy. It's clearly not working. You keep doing the same economic prescriptions over and over from an external source. They're very unpopular. They often work with dictators. And so I think it's For these countries that have recurring problems, I think it's both a mismanagement domestically, which is very hard to recover from once you're in that state. And then two, it's just external

Starting point is 00:45:06 entities coming out and just keep pushing things that don't work. So I just think it's, in some ways, I think it's a technology problem. I think we have a, I think our money technology is still lacking in one way. But it's also just a, it's a political problem and it's a geopolitical problem. 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 2 or running an enterprise GRC program, VANTA keeps you secure

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Starting point is 00:48:27 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. Yeah, it's just so complex. And to your point before, you have this element of moral hazard. So if we mess up everything, IMF will come in again, then they'll probably tell us something that's silly, but at least they'll bail us out. I don't really know how to change that. I don't think anyone does. It's up there together with being the chair of the BOJ or something. Like one of those impossible tasks that sounds very prestigious, but probably no one wants really to see if they can solve. Lynn, I wanted to talk to you, and sort of like shift gears here a bit, and talk a bit more

Starting point is 00:49:20 perhaps philosophical about money, as it hasn't been philosophical enough with everything being covering so far. But, you know, as I've gotten older, perhaps a bit, not a lot, but a bit more money. And I also find myself thinking a lot about how I spent my time and how that works together with building my portfolio and really a quality of life. And you know what? I have this thesis really to speak in like CNBC type headlines. I would say, optimize independence is one, but also sleeping well at night is another. And I wanted to explore this thesis a bit more also knowing that it's inherently filled with pitfalls, right?

Starting point is 00:50:03 So sleeping well at nights, that's very different from one person to another. One might say, I cannot sleep if I own Bitcoin. And another might say, oh my God, if I did not own Bitcoin, how could I sleep at night. So I guess my question for you is, how do you think about independence and sleeping well at night personally? And how would you encourage our listeners to think about optimizing for those two things? And of course, also, you can challenge the entire premise of that question in the first place. Yeah, so I won't challenge it. I think there's two things that a person has to optimize for that are somewhat conflicting, and that's kind of the balance. One is that someone

Starting point is 00:50:42 should be diversified and safe enough that they can sleep at night, right? And that means different things to different people. But basically, if there's an asset in your portfolio that's causing problems and that you keep thinking about, you maybe shouldn't own that asset or learn more about it to check if that's an asset you what you maybe should get rid of, right? Or maybe you're overexposed to that asset, right? Maybe if you have, you know, it's like one gigantic property is like a huge percentage of your net worth and you're always worrying about the property. Maybe you should sell that property and get a smaller property and diversified in other things, for example, right? It depends on what the context is. So one is that, yeah, you do have to

Starting point is 00:51:18 you have to understand yourself, understand your psychological limits and also the limits of your knowledge and make sure that you're properly diversified and safe that you can get through periods without making bad decisions. You don't want to sell at the bottom and buy at the top and kind of lose capital that way or hold things that are too big a percentage of portfolio that crash and never recover. Another end of the spectrum, if a person's sleep is based on on things that aren't true, that's going to be a problem, right? Because they have to make sure over time that the things that cause them to step at night are reasonable things. And so part of it is just education, learning, expiration to make sure that the things, the risks that

Starting point is 00:51:55 they're concerned about are the right risks to be concerned about, or at least a close approximation of the right risks to be concerned about. And one of the challenges in the current era, I mean, finance and economics and managing assets is, I mean, it's a full-time activity. I mean, even professional money managers have a tough time being the S&P 500. Most people, like, if you're a doctor, if you're a lawyer, if you're an engineer, if you're a school teacher, if you're a plumber, if you're whatever you do for eight hours a day or more, right? If you also have to come home and just kind of look, then you're managing kids, you have a family,

Starting point is 00:52:28 you have whatever your life entails, you have hobbies. If you're also expected to just pour tons of hours, it's a multiple different asset class. You have to know how stocks work. Well, how does money creation work? What's going on with commodities? What's going on with Bitcoin? What's going on with foreign equities? What about real estate? Right? It's kind of overwhelming for a lot of people. And they're almost expected to have like a second career. And it's one of those things is that, unfortunately, in the macro environment that we are in now, it's somewhat unavoidable. I do think that it is important, both even just managing your money, but also just making decisions about where you want to live, who you want to vote for, that kind of thing. It's important to be a very informed person about economic. I think it's something that I wish it was more taught in schools. I wish people were more interested in general in it while acknowledging that not everyone can just put multiple hours a day into the study. So I think it's a combination of, one, you want to have your portfolio simple and diversified enough that you're comfortable with it, but that you also want to late over time increase your level of knowledge so that to make sure that you're excited about or that you're concerned about do align as much as possible with reality. I wanted to talk a bit about what you said about you can only sleep well at night if what you believe is true. It's just opens up for a bunch of other questions because how do we know what's true?

Starting point is 00:53:48 And let me try to explore that a bit more. So I have a, I guess what you would call a conventional business education and financial education, have a degree in that. And we were taught already, already, I think, on the undergraduate, but definitely whenever the graduate, we had like these stock investing. where you learn a lot of things, but not anything about stock investing, ironically. And one of the things you learned, at least we learned, was that Warren Buffett was lucky. And Buffett was the luckiest person, which was why he had the best returns.

Starting point is 00:54:19 And because it could be explained with the efficient market hypothesis. And of course, like my old professor, you know, he always had this joke like, oh, but, you know, look at Buffett, but I drive at Kia, perhaps I'm not. We did have a section about Warren Buffett being lucky in the textbook. I know it sounds crazy, but we're dead. And so coming into the stock market myself and having another job in the financial industry, you sort of like learn that markets are not efficient and you start to think differently about investing.

Starting point is 00:54:47 Then a few years ago, I read this book about the modern monetary system, MMT. It was Stephanie Kelton's book, The Deficit Meth. And I read about it first and I felt there was ridiculous. but I also kind of felt, well, it was also kind of ridiculous going in. Like, I learned in business school, like Warren Buffett. It was just sure luck. So why wouldn't I try to challenge myself? And I started reading the book, and I found myself being so, I wouldn't say angry as the right word,

Starting point is 00:55:15 but I kind of feel it was such a waste of my time that had to stop midway, which I usually don't do with books, because I felt it was just crazy. But it also sort of like goes to the point about, what if it's not? And I'm not so much talking about EMMD as I'm saying this, but like this whole notion about, what you have believed in so far just isn't true. So how do you think about that whenever you learn about finance, giving that you also want to sleep well at night? I think one thing I keep in mind is that the era we live in, like it's like a fish and water, right? Whatever you live in just seems normal. One of the challenges that the era we live in

Starting point is 00:55:51 is conceptually just very unique in terms of monetary history. Basically, it's the only time in the world where the entire world was on a Fiat standard, and it's only in our parents' lifetimes, right? It's not as long-lasting and durable as we think it is, or at least historically, and the future can be, there's a broad range of outcomes for what the future could look like in terms of how our money works. And so I think the first step is just to always have an open mind. Money's constantly transforming, especially in the past 150 years. And there's no reason to assume that this current period is like the end state that we've fixed money. I think our prior discussion around why are there dozens of developing countries and the IMF doing the same

Starting point is 00:56:32 thing over and breaking constantly? Maybe the system's not the highest possible peak of how the global financial system is going to be structured for the foreseeable future, right? So I do think it's important to keep an open mind about how money works. I think that's number one. And just kind of always challenge your assumptions and always say, what are the most foundational axioms that you're assuming just might not be true? It might work differently than you think. When it comes to MMT, I find it interesting because I obviously I generally disagree with most of what they say, but there's a couple of observations they make that are not wrong, right? It's mostly that they describe how the system works, that in many cases they're not necessarily wrong. It's then what

Starting point is 00:57:10 they say you should do about it is where I would very much disagree. Like the idea that the government deficit is a surplus for the private sector is often a term you'll hear in MMT, and it does become relevant in certain contexts, right? But because I think a lot of MMT people are incorrect about a lot of things, they get disregarded. Whereas, like, in many schools of thought, even if you almost entirely disagree with that school of thought, there's usually a couple things in that school that are useful to incorporate into your broader knowledge set. And so I think even things you disagree with are kind of worth exploring up to a point. I like to phrase it as like, you should be able to steal man any kind of argument, right, that's relevant to things you care

Starting point is 00:57:47 about, right? Meaning that you should be able to state the case for that school of thought in a, like, in the way that makes it the strongest possible description of that school of thought, and then be able to dismantle it, right, assuming you disagree with it. And so I think that applies to MMT or other things as well. Basically, I think it's important. One, always challenge your own assumptions and two, make sure you fully understand opposing schools of thought rather than just dismiss them. Yeah, and I think that's a great idea. And for the record, I did ask Stephanie Kelton to call on the show with no luck. And I wanted to continue talking a bit of more about money and happiness for the lack of better words. And there's this wonderful book here. It's

Starting point is 00:58:28 called The Art of the Good Life that's written by Ralph Debelly. And in the afterword of that book, he talks about how you can't say what a good life is, but you can easily say what a good life is not. Just kind of felt that was an interesting observation. It really makes me think about how Monger also talks about you have to invert, always invert, sort of like thinking about it from that angle. And I wanted to bridge this to our discussion about creating the right portfolio. So perhaps instead of talking about the optimal portfolio and, you know, thinking about how much equity were what I need, how much long duration bonds were needed. But like, I guess I wanted to rephrase that question as you, then, instead of talking about the optimal portfolio, can you tell me about

Starting point is 00:59:11 what is the optimal portfolio not? So I think the optimal portfolio is not, or kind of the description of a bad portfolio would be one that is too concentrated, especially in something that you don't fully understand, especially something that is extremely volatile or that you're excited about it. If you're super excited about your portfolio, if you think about it all the time, probably taking too much risk, really. You're probably not having a sober analysis of the risks and you're over enthused and you're open to more volatility and downside risk than you're probably aware of. So I see people that, for example, they'll have, say, a similar macro economic outlook as me about, they expect the 2020s on average have higher inflation, XYZ. And then they, so

Starting point is 00:59:55 their portfolio is like a huge amount of like junior gold and silver mining stocks and then crypto and then like something else. And it's like that, this is a basically extremely like a volatile portfolio, very gamified, very explosive upside and then can collapse. And then can collapse. It's also an area where the median entity does not do well with the long term, right? So the median gold miner is like a terrible long-term investment over history. And the median crypto just doesn't do anything, right? I mean, there's 20,000 cryptos. We keep making more that they're not really solving, most of them, not solving unique problems. Most of them don't have like a second or third cycle of rising growth. Most of them have these like pump and dumps and then

Starting point is 01:00:41 they're dead. So if someone's entirely in like mining stocks, like junior mining stocks in crypto, it's probably not conducive to long-term wealth, like for example. So I think that's one the examples I often see is just being overly focused on a narrow set of things that are also not necessarily sound investments. That's a good shift on an awful portfolio. On the other side, and this goes back to actually like making sure that the things that allow you sleep in night are not entirely wrong. There's a lot of people that don't want any volatility. And so, like, they're entirely in, like, cash and government bonds, or almost entirely. And the risk there is that you're entirely attached to that public ledger, right? You're entirely attached to the competence of institutions.

Starting point is 01:01:24 You're entirely, you hold non-real assets that can be, their supply can be changed. They can underperform inflation for years and years. They can have big stepwise devaluations. And so, for example, of people in 1940s were afraid of war and therefore they held cash in government bonds, they got sharply devalued. Same thing. If you went into COVID and you were afraid of owning any assets and you held cash in government bonds, well, you got sharply devalued, right? And so there is also something we said about being overly cautious, not understanding any assets, not wanting to own any assets, and just owning the underlying currency or currency derivatives, because that's also, I think, a key long-term risk. You risk failing to meet your retirement goals and you're basically, you're kind of like

Starting point is 01:02:09 the sucker of the table that keeps getting drained like a melting ice cube to pay for other things, right? And so your fear of volatility is kind of being used against you. Right. So I think a kind of an example of what a good portfolio is not is one that tends towards extremes, one that is very casino-like or one that is so risk-averse that it is pretty much just designed to fail to recruit purchasing power. It's interesting to think about how we all are the product of the time and what we experienced. From my time as a college professor, I was for obvious reason speaking with a lot of young people and a lot of them were interested in investing. So we talked a lot about investing and they only own cryptos, but they talked to me about

Starting point is 01:02:50 how diversified the world because they had so many different cryptos. And then I came, you know, visit my parents and, you know, they paid off their house and they have the rest of the wealth in cash. and they feel like they're safe. And it's, so I can, I can stand there in the middle and be like, oh my God, why would anyone only own cryptos? Why would anyone, you know, pay out their mortgage and just have the rest in cash? And look at my fantastic portfolio.

Starting point is 01:03:14 And that sort of like goes back to also what I said before about, you know, MMT and feeling it's wrong, which it may or may not be, who knows. But we all have these preconceived notions of what have we experienced. We might not think about what we have experienced, but we all have our own truth based their own, our own experiences. Yeah, I think it's the challenge because I think a diversified portfolio is the best risk-adjusted return you're going to get. The downside is that it either requires knowing a lot about different assets

Starting point is 01:03:41 or it requires kind of blindly trusting the process with ETFs and things like that, right? Because it's one of the things that's just universally important. We have to know about how different assets work, even though we should, in a better macro environment, we shouldn't be expected to. We shouldn't have to know about different investments the way that we do these days, but especially in this kind of current era, which I think is a challenging transitional period. It is important, I think, to know about financial markets, about economics, and about kind of how to preserve and grow your purchasing power, because I think this is an important life skill that we all have to focus on.

Starting point is 01:04:15 And avoid extreme, make sure you're comfortable, but then make sure your threshold for what your knowledge-based comfort level is always going up over time. I guess I want to use that as a transition into talking about how you spend your money to optimize for happiness. Again, I'd say before I do, please challenge the premise if you want to that you do use money as a tool for happiness or perhaps that's not the primary use. My premise is that people use money to optimize for happiness. They might do it in the wrong way. They might do it for the wrong reasons, but that's the underlying premise of having money. So I'm sort of like a bit more of philosophical discussion, but I want to throw it back over to you, Len.

Starting point is 01:04:58 So I actually, I think we can take the prior discussion and combine it into that because I think the way that I approach how to spend money is to invert. Right. So it's less about spending money to be happy. It's about spending money to solve problems or things like fix things that make me unhappy. There are things that are fixed by money, which some things are. Right. And so I mean, there's actually one thing you can do is look at studies. Right. So what are things that like reliably make people make? miserable, like really long commutes, for example, a really bad mattress. There's like certain things that like reliably make people unhappy. So one is using money to solve those like reliably unhappy things, but either being able to get a different job or being able to get a different home, right, to either not have a commute or have a good commute, for example, being able to,

Starting point is 01:05:42 there's certain things that just give you discomfort to solve those. Like for example, I don't travel well. Some people just travel well. I have trouble sleeping on airplanes. I have trouble just sitting up for like if I'm going international and like sitting up in a cramped seat for like 12 hours. So for example, splurging on like a business class sometimes is a way to, I get there and I don't feel like I regretted coming here, right? It's like it makes the trip better. On the other hand, like I avoid things. I don't spend money on like cars.

Starting point is 01:06:07 I don't spend money on designer clothes. I don't spend money on just frivolous things that I, that don't really bring me happiness, but that in some context might bring other people happiness. And so I mainly use it to solve pain points. And then I guess even zooming out more philosophically, one of my pain points is the idea of uncertainty. So I might have mentioned on your podcast.

Starting point is 01:06:27 I've certainly mentioned another podcast, my writing. When I was a kid, I was homeless for a period of time. And then after that, it was like a trailer park. The childhood was always like, always kind of a financial uncertainty. And so I think that kind of, if anything, it kind of overcorrected my mentality towards saving, investing, having very high margin safety for everything. And so for me, one of the things I do with money is save it, invest it, build large and larger kind of income streams, build large and larger savings reserves, up to a point

Starting point is 01:06:55 so that I generally reduce the uncertainty around the future, right? So that's another pain point that I solve, in addition to there's more just like direct pain points. So I think if someone realizes that money doesn't create, money can just fix a couple things that can get in a way of happiness, whether it's a long commute or whether it's not having enough time with their family or whether it's just you hate flying, for example, whatever the case may be, if there's certain annoying things. Money can solve those annoying things, but happiness doesn't come from money. Happiness comes from your outlook on life, your relationship to other people, being passionate about how you spend your time, what work you do or what hobbies you do. It comes from health, staying in shape,

Starting point is 01:07:32 getting sun, getting exercise. That's where happiness comes from, and money is just kind of a tool to, I think, eliminate or reduce problems. I think that's well said. And it reminds me of that story where, you know, a rich man died and it was asked, how much did he leave? And the answer was was all of it. Lynn, it's always wonderful speaking with you, and I'll really look forward to to hopefully being able to invite you on again. Before we let you go, I wanted to give you an opportunity to tell the audience where they can learn more about you, your research, and your wonderful blog. Sure, I'm at Lynn Alden.com so people can check it out there. I have public articles. I have a free newsletter people who can sign up to. It comes out every six weeks on

Starting point is 01:08:12 average. And then I also have a low-cost research service for people that want more frequent updates every two weeks approximately. So we cover macroeconomic, specific investment ideas, and try to just tie a lot of these teams together. I have these kind of like long-term thesis, like what do I expect the decade to look like directionally? But then just things change over time. We have periods where we have counter trends to those these CCCs. And so it's kind of like these other types of updates kind of just analyze what's happening. What is the process? What is going as expected? What is going as expected? What is the expected timelines for some of these things? And so, So I just basically think this is a challenging decade.

Starting point is 01:08:48 And I'm going back to what makes this happy, I get a lot of enjoyment out of like being a detective, essentially, financial detective, just kind of a machine, trying to put complex things together in a way that is accessible to even just myself, just kind of figure out things to myself and hopefully share some things along the way. I would just highly encourage everyone to go into to Linold.com. The blog is absolutely amazing. Thank you again, Lynn, so much for coming here on the show. as always, it's a privilege having the chance to speak with you.

Starting point is 01:09:17 Thanks for having me. Always happy to be here. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors

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