We Study Billionaires - The Investor’s Podcast Network - TIP589: Stock Market Crises & Bubbles w/ Brendan Hughes

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Brendan Hughes to chat about his new book, Markets in Chaos. Markets in Chaos covers various market crises, including the COVID-19 pandemic, the Latin American debt crises, the South Sea bubble, and France, Germany's hyperinflation post-World War I and many more cases. Brendan is a registered investment advisor for Lafayette investments and has more than a decade of industry experience in investments and public finance. During this chat, we cover why it's important to study history as investors, what led to the massive

Starting point is 00:00:34 hyperinflation in Zimbabwe, the market crisis in Iceland that led to their stock market rising by 900 and then swiftly falling by 95% during the Great Financial Crisis, the lost decade of Japan and the potential parallels Brendan sees between the Japanese stock market bubble and the markets in the U.S. today and much more. This was a very interesting discussion that really makes you take a step back, and consider how we can best preserve our hard-earned capital during the most extreme market periods. With that, I bring you today's episode with Brendan Hughes. You are listening to The Investors Podcast, where we study the financial markets

Starting point is 00:01:16 and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Clay Fink, and today I am thrilled to be joined by Brent. Brendan Hughes, Brendan. Thanks so much for joining me today. Thanks a lot for having me, Clyde. I'm very happy to be a guest. Well, I just finished reading your new book. It's titled Markets in Chaos, a History of Market Crisis around the World. And this book received praise from Tom Gainer and Lauren Templeton, both who have been guests on the podcast in the past. So I'm super excited to

Starting point is 00:02:02 dive into this. At the start of your book, you say this book is useful for those seeking to learn about the history of market crises and individuals who want to learn about protection against downside risks for an investment portfolio. So I think a good place to start is how about we start with defining what a market crisis is in the first place? I would define a market crisis as a shock to the price of assets. And my book, Markets in Chaos, the history of market crises around the world, documents case studies tied to different types of crises. The book covers classic financial crises tied to the banking system in Iceland, Indonesia, Chile, the United States, and Rome, Italy. And these are scenarios where basically there's an extended period of easy monetary policy

Starting point is 00:02:48 and loose oversight. And then there's booming credit creation that coincides with rising asset values. It's a very similar story in each case. And eventually, interest rates are increased in an attempt to quell inflation. And then all the companies and things that were doing crazy things when money was cheap end up getting into trouble. And we've seen that right now after about 15 years of easy monetary policy following the global financial crisis. And then the other types of market crises, there's cases that review market bubbles in France and Japan where the quoted price of assets just far out strict fundamentals. Siting an example that I note in my book, in the epic market bubble in Japan in the late 1980s, which some consider to be the greatest in history in terms

Starting point is 00:03:35 total market capitalization impact and recovery time. The Imperial Palace, which, if you don't know, the residence of the emperor of Japan was reported to have been worth more than the entire state of California, which is just hard to comprehend, but this was a crazy time in Japan. And then there's also crises documented that are tied specifically to macroeconomic event triggers, such as COVID-19, the United States, and a few hyperinflationary scenarios such as in Zimbabwe and Germany And citing an example, in the German hyperinflationary episode in the 1920s, it was reported that the price of meals at restaurants was different by the time someone received their food as compared to when they were ordered. Now, that's just like almost impossible to fathom. And, you know, if you're living in a developed country and things have been relatively stable.

Starting point is 00:04:28 But we're talking about Germany. We're not talking about some small country. So those types of things can happen in anywhere. But yeah, the book covers those types of situations. And I think it's a good reminder that a lot of people look at what they've seen in their lifetime and they say that this is what always happens. But that's not the case. Sometimes what's happened recently and more broadly in someone's lifetime, that can in fact be an

Starting point is 00:04:54 aberration. And I think that that's important to think about. And that's one of the main reasons that I wrote this book. I think it's important for people to know those types of things. I totally agree. You have some great points there. Just to give people an idea of what types of things can happen. And people, I think, just generally have this bias where, like, you know, these terrible

Starting point is 00:05:17 things that happen to other countries, oh, that'll never happen in the U.S. And, you know, people just have this sort of bias where, you know, things tend to be the way they've recently been. I also think just people look at even just the past decades. If an investor started investing just in the past decade, and they'll be like, oh, well, this works really well during the 2010. So they sort of assume that it's going to continue to work. Before we dive into some of the examples here, I love for you to just talk more about this

Starting point is 00:05:47 importance of studying history because, you know, you mentioned the recency bias that people tend to have, but talked more about these benefits that we can receive from studying broader history and diving into some of these more extreme examples of market crises. I think it's really important to study history and Mark Twain is often credited with coining the phrase, history doesn't repeat itself, but it often rhymes. As I was working my way through writing this book and for any listeners out there, you start to notice patterns that have happened for thousands of years. It's actually crazy how similar some things have happened and it's just really interesting. But as an investor, I think it's critical to have an understanding.

Starting point is 00:06:29 of what happens in the past so we can better anticipate the present and future in terms of potential ranges of outcomes in terms of what happens to assets, government responses, an investor psychology. And like some may be surprised that the Roman response to the financial crisis in 33 AD, so that was over 2,000 years ago, it was very similar to what happened to the United States and what they did in the response to the global financial crisis. And that's inject massive liquidity into the system. and keep interest rates very low.

Starting point is 00:07:02 So you see, like, in a span of 2,000 years, people are doing the same things. And that's a recurring theme that I cite throughout markets and chaos. And during the COVID-19 pandemic, we kept hearing that this was an unprecedented event. I don't want to downplay, you know, some of the negative things that came out of COVID-19 in any way. But the press kept saying that this was unprecedented, and that's just a very untrue statement. And I cite the black death as a reference because in the mid-1300s, between 30 and 60 percent of all Europeans were estimated to have been killed. And that's a wide range because they didn't have the same ways of tracking data that we do now in the mid-1300s. And also between 75 million and 200 million people globally were reported to have been killed.

Starting point is 00:07:52 And the pre-pandemic population was just 475 million at that time. So obviously this was, you know, a world altering event. And it really, it took 150 to 200 years for the populations to recover from this event. So I don't want to downplay what happened related to COVID-19, particularly for the people that knew someone that died or something of that manner. But we've seen these these things before. And each time they've impacted the world in different ways. Most recently, like related to COVID-19, I think some things that came out. of that where to some extent, you know, hybrid work is here to stay. Like things like mobile

Starting point is 00:08:31 ordering and such, those trends were already in place before the pandemic, but they were accelerated. And like looking back at scenarios like the Black Death in the mid-1300s, like there was huge world-altering forces. Like there was a labor shortage that lasted for hundreds of years because of this. So in some ways it's difficult to compare an event like that so long ago to what happened now. But I think it's important to just look at it. And I think you can better project the range of things that can happen coming out of it if you have that knowledge going into it. Let's dive into one of the somewhat more recent ones. You mentioned Rome and the Black Death. Let's dive into Zimbabwe in their hyperinflation event. And this is actually

Starting point is 00:09:22 considered to be the second most severe period of hyperinflation in modern history behind Hungary. Hungary's hyperinflation event in the 1940s. How about we define what levels of inflation are considered to be hyperinflation? And then also paint a picture to how often do these sort of occurrences happen throughout history, these hyperinflation type scenarios? Hyperinflation is often defined as a period of rapidly rising prices. for goods and services when price increases usually measure 50% month over month. But really impractical terms, hyperinflation is basically when money stops being useful.

Starting point is 00:10:04 I think that that's a better term. Like when citing that example in Germany in the 1920s where you order food and then the price is different 15 minutes later, the money is not useful in those situations. And as I documented in my book, Markets in chaos, in 2008 at the peak, of the Zimbabwe and hyperinflationary crisis. Inflation was reported to have been 79.6 billion percent month over month. That's difficult to comprehend when, you know, in a country where people are complaining about what inflation was 10 or 11 percent, you know, that's not good either, but slightly

Starting point is 00:10:42 below 80 billion percent. And I noted some of the most notable hyperinflationary episodes in recent history, meaning the past 100 or so years. And that includes Germany in the 1920s, Hungary in the 1940s, Yugoslavia in the 1990s, Zimbabwe in the 2000s, and Greece in the 1940s. And hyperinflation usually occurs as results of some combination of war, economic turmoil, high national debt levels, excessive money printing, political instability, and loss of confidence in the monetary system. And how did this, you know, end up happening in Zimbabwe? We see these cases of just terrible things happening for different countries. But to see hyperinflation, this is like a very extreme type of scenario.

Starting point is 00:11:29 So how did this end up playing out for Zimbabwe? Yeah. So I can walk through the hyperinflation events in Zimbabwe. The seeds for hyperinflation in the country were planted when the government launched land reforms that resulted in Zimbabwe, it's seizing white-owned farms and transferring this property to local black individuals that lacked farming experience. So once this happened, there was a food shortage and foreign investment dried up because people didn't have confidence in that their assets weren't going to be confiscated.

Starting point is 00:12:02 And then real estate values were obviously negatively impacted by this. And as is typical in hyperinflationary scenarios, the government was increasing national debt. So in the 2000s, the Zimbabwe's economy, you know, started to go downhill, basically. consumer staples were in short supply, like it's typical in hyperinflationary scenarios. Inflation increase in confidence in the local government eroded, and people started leaving Zimbabwe in large numbers. So as usually happens when these types of scenarios start to play out, the government responded by printing more money. And this is a classic response to these types

Starting point is 00:12:41 of scenarios, and it ultimately leads to more inflation. So as previously mentioned, inflation, was estimated to have peaked around 80 billion percent month over a month. And during this hyperinflationary period, some economists estimate that between 75 and 90 percent of the local population was unemployed. That's, again, difficult to wrap your head around that almost nobody in the country was working. And Zimbabwe has never really recovered from this period. And I think that that is tied to trust in the government and the corruption that it's persisted. They've periodically attempted to implement various new currencies and they haven't worked out. And international investors and lenders have largely neglected the markets for a long time now, and I think rightfully so.

Starting point is 00:13:35 You mentioned just the trust eroded. And when citizens of a country, they lose trust of the political establishment. That's sort of when the release valve is let go. it's gone. Like they can't, you know, sever. Once trust is lost in a currency, you really can't get it back. And it reminds me of countries today that have higher levels of inflation, but they don't have quite the levels of what would be defined as hyperinflation. Turkey and Venezuela are two countries that come to mind. What do you think keeps enough trust in a currency that like that, the sort of in between where it's not stable, it's not hyperinflating? What's keeping that release valve from sort of being let go?

Starting point is 00:14:17 I think it has a lot to do with confidence in the government itself and laterally that flows over to what's going on with the currency. I talked about that when I was documenting Germany in the 1920s because I was comparing and contrasting the German and Zimbabwe and hyperinflationary scenarios. And ultimately, Germany got their hyperinflation under control. And I think that that has a lot to do with people had more confidence in the German government as compared to Zimbabwe and you can throw modern-day Venezuela in there as well. Because Germany, they ultimately rolled out a new currency and they said that it was backed

Starting point is 00:15:00 by hard assets. But if everyone went to go, said, we're going to go try and retrieve these hard assets all at once. There's no way that they would have actually been able to fulfill on that. So I think it had a lot to do or it has a lot to do with the trust in the political institutions. Another one of the chapters, you dive into Iceland. This is a quite small country, and this isn't a story that I had heard of before. A lot of people have heard about the story of Tulip Mania, even Zimbabwe. People hear about the hyperinflation event there, and people are

Starting point is 00:15:34 quite familiar with COVID-19, since it's so recent. So please tell this story of Iceland and some of the things you picked up in studying their crisis. The story of what has a lot of, happened to Iceland during the global financial crisis in 2008 and 2009 is really interesting. And if you want to dive more into the global financial crisis, I would recommend looking at Iceland. Even though it's a small country, as you noted, they have 375,000 people. The country GDP is about 26 billion. So in other words, it's very, very small in terms of both population and size of the economy. But the story of what happened there in 2008 and 2009 is really interesting. and I think business classes can learn a lot from studying it.

Starting point is 00:16:16 Iceland was one of the hardest hit countries during the global financial crisis. And like the seeds were leading up to the global financial crisis. Like between 2003 and 2004, the Iceland stock market skyrocketed 900% in the span of one year. And like this is a recurring theme that I document throughout my book. But there's a period of easy money, which as we saw during the most recent 15 year period, where there was easy money. When this happens, people pile into basically anything but cash because cash doesn't pay a lot. So people, you know, buy up everything else.

Starting point is 00:16:54 And the money supply in Iceland expanded by 10fold in the 14-year period ending with the global financial crisis. And I think a lot of these types of events have really been possible because I tie back to the huge moment in 1971 where the United States severed, the United States. the link between the U.S. dollar and gold. And that is really, I think, facilitated a lot of these, you know, ultra-easy monetary policies and also just piling on massive amounts of debt at the federal and business levels. Yeah. So what happened with the banking system within Iceland and then ultimately led to the collapse of this massive bubble in the stock market in their economy?

Starting point is 00:17:39 Yeah. So what happened in the banking sector was a, astounding, even by historical banking sector collapses. The entire banking sector in the country basically fell apart in one week. In the course of just three days, the government effectively nationalized the three largest banks, and the three largest banks made up the vast majority of the entire banking sector. But one of the core issues that led to the demise of the Icelandic banking system was the banks started to increase. their reliance on foreign deposits. We've seen this happen and I documented this, like, this was going on during the Asian financial crisis as well. But leading up to the global financial crisis, capital flows that Icelandic banks exploded. And this was owing to investors searching for yield. So during easy monetary, you know, when interest rates are low and a lot of countries, they'll go to places that are offering, you know, a bit more yield, like in this case, Iceland. So when things, When it started to become apparent that there was trouble brewing around the world in the global

Starting point is 00:18:47 financial crisis, these foreign deposits quickly fled. And these were deposits that these banks were now relying on for stability. So you also had various problems. Like there was increasingly exotic financial instruments such as CEOs, which are collateralized debt obligations, being rated as investment grade and similar to what we saw in the United States. Things like that. 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,

Starting point is 00:19:25 and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, and journalists, and investors and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now.

Starting point is 00:20:03 You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place

Starting point is 00:20:48 where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast

Starting point is 00:21:29 AI-powered decisions with confidence. And now with the Netsuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, Netsuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, Demycifying AI at Netsweet.com slash study. The guide is free to you at Nessuite.com slash study.

Starting point is 00:22:01 NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just get to the company.

Starting point is 00:22:31 Getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions, and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. your business today with the industry's best business partner, Shopify, and start hearing

Starting point is 00:23:03 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. Related to Iceland, in your book, you also talk about how the fractional reserve system is essentially you know, it's a very flawed system. And this is really relevant to Iceland because it isn't the only country in the world that has a fractionally reserved system. It applies globally and including in the U.S. So could you talk more about these flaws that you point out in your book of the fractional reserved banking system? Fractional reserve banking is the commercial banking system that's still employed around the world today. And I'm pretty sure the average citizen isn't even aware.

Starting point is 00:23:59 that when they deposit money into a bank, the bank often lends this money to someone else. So the entire system is predicated on the idea that not too many people are going to go and try and claim their deposits at the same time. But as we know from studying various events in history, this is often not the case, not often, but it happens during crises. People go and try and get their deposits. But a quick summary of the fractional reserve banking system in in terms of numbers is that banks effectively earn one to two percent return on assets, and then they leverage these low returns, like approximately at a 15 to one ratio, so they can juice their return on equity.

Starting point is 00:24:42 And commercial banks facilitate this heavy use of leverage by printing money that basically out of thin air. So the extreme leverage required to operate a bank is also why banks go bust quickly when conditions deteriorate. And in Iceland, this blowup happened in a week. Sometimes it takes longer to develop. But one of the core issues with the modern fractional reserve banking system is that the interests of private commercial banks and central banks, they're just not aligned. Private commercial banks care about how much profit they produce, irrespective of how their money creation impacts the health of the domestic currency or financial system.

Starting point is 00:25:20 So banks inevitably get into trouble owing to their flawed business models. And when this happens, governments look to these institutions and they ask, you know, is this company too big to fail? And we saw this in the United States during the financial crisis as well. And if the answer is no, these firms are allowed to declare bankruptcy. And consumers are then reimbursed up to a certain amount if they're insured by the FDIC or whatever the local equivalent of FDIC is. And if the firm is deemed to be too big to fail, the government fails these companies out by barring huge amounts of new, newly created paper money and then lending it to this firm. And most consumers aren't aware of what happened, but they've just been taxed by the government

Starting point is 00:26:02 in the form of higher inflation. And this is a, it's frustrating to read about this and study it because this is just a recurring cycle that it keeps happening. And I don't think that most people are aware that they're being taxed in this manner. Yeah, I had a comment here related to Iceland. You mentioned in one year, their stock market went up by 900%. And then if I'm remembering correctly from your book, it proceeded in the collapse of the banking system, the stock market fell by 95%. I think it's like such an important reminder to keep in mind of our recency bias.

Starting point is 00:26:40 And remember that ever since the great financial crisis, we've very much been in a period of easy money in the United States. And because of this easy money period, you see this credit expansion, you know, rising debt levels. and the money supplies essentially expanding and expanding. Part of that, at least, is going towards the growth of financial assets. And I think it's just important to really tame expectations and just remember that, you know, credit, this credit expansion can lead to essentially the illusion of wealth. You might feel wealthy, you know, checking your accounts and checking your your investments. But just know that when that expansion goes away, then your investment values might not be a year from now as near as much as what

Starting point is 00:27:23 they're worth today. And that's not like me calling for stock market corrections or anything. It's just to, I think, tamper those expectations and keep in mind where we are at in history and how that relates to past periods such as what happened in Iceland. Yeah, I think that's a great point, Clay. And thanks for bringing that up. Yeah, when we have extended periods of easy, easy monetary policy, it often leads to asset price inflation. And this is not a type of inflation that is covered. Like when, you know, CNBC In those channels, they're covering consumer price inflation. Like, that's what they're always citing is what inflation is.

Starting point is 00:28:01 But asset price inflation is very real. Like things like real estate values and such, and that's not captured in consumer price inflation. And it's when people cite just consumer price inflation as being inflation, that's not remotely close to a full depiction of the whole picture as to what's going on. I wanted to move on to Japan. You studied their lost decade from 1991 through 2001. Japan's stock market, it peaked around a PE of 60 in 1989. And people are pretty familiar with this lost decade of Japan. As recently, we've seen that, you know, still today, there's the Niki trades below where it was in 1989. And it sort of points to what can happen over, you know, when a market's in a bubble. And then they're facing all these issues that we're going to be diving into there. And what led to their stock market crashing and correcting was the central bank raising interest rates and tightening financial conditions.

Starting point is 00:29:03 And from the end of 1989 to the bottom of the market all the way in 2003, a very choppy ride along the way. But it ended up bottoming in 2003. The market fell by 80%. So talk to us about this Japanese bubble and the lost decade that followed. for them. Yeah, so I'm pretty sure the Japanese index, just in the past few months, like maybe in June past surpassed the levels in 1989. So you basically, for over 30 years, you would have earned effectively nothing in inequities in a country. And I think that this is a very important point

Starting point is 00:29:41 to hone in on because U.S. investors have only ever known stocks to go up for most people's, most people's lives. And I think one of the takeaways from my book is to think more about country diversification just because of this example in Japan. But at the peak of the Japanese bubble in 1989, Japanese real estate was valued at four times the value of the United States real estate, despite Japan only being 4% the size of the United States. And as you mentioned, the equities in the country also had a PE ratio of 60. The Imperial Palace was. valued more than the state of California. It was by any measure an epic bubble even compared to some of the more memorable bubbles in history. But my big takeaway from this entire series of

Starting point is 00:30:32 events is to think more about country diversification because history suggests that a variety factors can prevent, you know, equities or real estate in a given country from, you know, perpetually rising like we've seen in the United States for a long period of time. People talk a lot about inflation, especially nowadays, but you don't hear too much about deflation. Deflation is actually something Japan has been, it feels like fighting tooth and nail ever since the mid-1990s. And deflation especially brings its own host of issues, as inflation does as well. And you'd think after a certain period of time that a country as developed as Japan would be able to figure this out. So what makes it so difficult for them to, you know, manage their economy and, you know, manage that deflation that they're working against?

Starting point is 00:31:26 Yeah. And I think I use the term in my book. They've been stuck in a deflationary trap that has lasted for several decades. And what's happened is that a lot of money was printed, but businesses and individuals in Japan have just not been convinced to invest this money. So they came to believe, at least for several decades, that cash will be worth more tomorrow than it is today owing to these deflationary pressures. So it becomes really difficult to convince businesses and people to invest when they haven't seen a return on assets for a really long time. So it becomes somewhat of a self-fulfilling prophecy that people just keep hoarding cash, not investing it, because they don't see any reason to because, you know, in recent, in history, nobody's earned a return on it. And that has been a short synopsis of the deflation that Japan has faced for a long time. And then what are the key factors that make deflation playing a role in Japan, whereas, you know, for example, the United States, we're dealing with

Starting point is 00:32:34 inflation? What are the key drivers there? Yeah, I want to point out that there's two different types of deflation. The deflation that we've seen in Japan for several decades is the more dangerous kind of deflation. And that's demand-driven deflation. And that's where, as I talked about, people in businesses choose not to invest. The government can print more money, try and do things to, you know, get people to invest the money, but they're saying, we're not going to invest. We haven't seen a return on this. We're just going to hoard money. This is really different from supply side deflation. In the U.S. in the 2010s, we didn't have deflation, but we had low inflation. And that was due to a lot of it

Starting point is 00:33:16 was tied to things like globalization, but there's also been technological advances where it's kept inflation relatively low. You had companies like Alphabet where they would just, you know, they're offering their services for at least free and monetary costs. They'll use an advertising business model. But those things kept inflation relatively well along with what I think has been a long trend of globalization that's being somewhat reverse now. But this is similar to the supply side deflation that we saw in the United States in the 1870s and in 1880s. It was also tied to technological innovation at that time.

Starting point is 00:33:55 And you had, you know, some of the business luminaries of that age, Rockefeller, Carnegie, and Jay Gould, they effectively opted to take additional market share instead of raising prices, you know, kind of similar to some of the tech. technology giants today. And I don't view that supply side deflation is being a bad thing, a lot of cases. Like, I don't know. A lot of people are not going to complain about getting free shipping. Like, that's not a problem. Whereas it's a big problem if people are not investing money. And in the demand-driven deflation as a, you know, a final way to wrap this up, there's fewer dollars chasing the same amount of goods and services. That leads to a decline in price.

Starting point is 00:34:40 Do you think that population growth plays a role here? Because, you know, when you think about an expanding economy, you can have increasing productivity, and then you can just have more people sort of in the workforce. And the U.S. has had this tailwind of, you know, foreigners coming in and moving to the country. Whereas Japan, it seems like their birth rate is essentially leading to their population. I haven't looked at the longer term charts, but maybe their population is declining. Is that population also an important factor here? I think that that can tie into perhaps the psychology. Like that could probably feed into people being more pessimistic about the business prospects and leading them to not invest.

Starting point is 00:35:23 So I think in an indirect sense, you're correct in that line of thinking. And we've talked about the easy money policy and the way this sort of plays into these, you know, market bubbles, market corrections that follow. And I can't help but think, you know, the Japanese bubble. It kind of halted because of, you know, came crashing down because of tightening monetary conditions, higher interest rates. Do you see any parallels between Japan at that 1989 period in the U.S. say in 2021, 2022, where the U.S. has now raised interest rates and obviously seeing some headwinds on that front and tighter monetary conditions? I do see some general parallels between the United States. in Japan, like in the present day, and a few similarities that I note are the bloated fiscal structure. Like, Japan has brandially been one of the most indebted countries.

Starting point is 00:36:20 And the United States balance sheet, at least in the present day, is not in good shape either. So they're similar in that sense. And we also both have aging populations that's an issue. And the recent policies in the United States have been less hospitable to immigrants. And Japan has for a long time now been one of the least hospitable countries in terms of immigration. It's very hard to immigrate to Japan. But in a more optimistic sense, at least from being a United States citizen, I do want to cite what I think is an important difference. And that's tied to innovation.

Starting point is 00:36:57 One of the problems that I find when I'm looking at Japan is if I want to have a quick idea of what's going on in a country in terms of innovation, I'll look at the list of most. most valuable companies. Because I can tell you a lot about what's coming out of the country, right? Like, what are they producing? Well, when I look at the list of Japan's most valuable companies, there's not a lot of what I would deem to be good companies and sectors that I would seek to have exposure to. There's a few ones like Sony and Nintendo, but most are in the old world economy, like automobiles, like similar to what's happened to Germany. I remain very optimistic about the United States in the sense that I have high conviction that a lot of the best innovation is still coming out of the United States, at least in terms of sectors that I deem to be

Starting point is 00:37:49 attractive, like technology. I mean, you look at the list of the United States, most valuable companies. You have a lot of good companies in the technology sector, which have more attractive financial attributes as compared to, you know, old world companies like automobiles. After reading this chapter on Japan in your book, I couldn't help but wonder, is that where the U.S. is at today? And I wanted to share some statistics that I pulled here. We mentioned that Japan's PE peaked at around 60. So it's very high levels that, you know, offer very low prospective returns without, you know, these very high growth assumptions in the future. And today

Starting point is 00:38:31 in the U.S., the Schiller PE is around 29. And you hear so many people calling for some call it the super bubble, you know, it's just this massive bubble in light of the easy money era. But I would also argue that these great companies that the U.S. has, the Microsofts, the Apple's, the Amazon's, I would argue that many of these great companies, they deserve to trade at higher prices, especially when you're comparing to many of the older economy companies. Like, I would argue that Apple does deserves this rate at a higher PE than many auto manufacturers. And you know, you can't just compare a company in their how richly valued or overvalued they are solely based on the PE. I think that is one really, really important thing that so many people just overlook or if someone

Starting point is 00:39:17 has a view of a super bubble, that just point to the PE. And, you know, you have to be very careful with making these very basic and simple assumptions, in my opinion, at least. And just before we hopped on the call, I noticed that your book mentioned that, the Japanese stock market, it increased by 900% in the 15 years leading up to the bubble. And, you know, I'm like, well, let's see what the U.S. has done in the past 15 years. So I'll first mention that this is sort of like a 15 years is kind of a cherry pick number because 15 years ago was the depths of the financial crisis. So like, you know, stocks were very low at that period. But regardless, just for comparison's sake, the S&P 500 is up just over 360%. And then I'm like, okay, well, let's look at the NASCAR. because that's much more heavily weighted towards the companies that did exceptionally well. And the NASDAQ is up over 1100% since that time. So with all that said, I'm curious if you agree that U.S. markets are nowhere near where Japan was in 1989 and it's much more reasonable valuations.

Starting point is 00:40:19 I want to start by saying that I actually don't look at PE ratios when looking at valuations. I know that that's different because a lot of PE ratio is almost universally considered to be the most quoted metric in terms of valuation. But I struggle personally to understand why this is the case. I look at free cash flow yield. That to me is the most important metric because not all, and this is contrary to popular belief, but not all earnings arrive in cash.

Starting point is 00:40:50 If the earnings don't allow you to repurchase shares, pay a dividend, invest in the business, or make an acquisition, I don't understand what good these supposed earnings. are. But relative to earnings, cash flows are much harder to manipulate because over time, the cash that comes in the door is just the cash that comes in the door, whereas accounting earnings can be manipulated by a variety of factors such as understating impairment, which is rampant in sectors such as banking and changing the classification of operating expenses

Starting point is 00:41:22 to extraordinary expenses and things like that. So looking at free cash flow yields in the U.S. market today, I don't think it's at least in my view of. a bubble like Japan in the 1980s, but not bargains like, you know, during the global financial crisis. But as you alluded to, that that's a blanket assessment. It varies a lot, you know, based on individual companies. But what I will say is I don't think that some investors that have been investing since well before the arrival of the internet have come to appreciate the growth that can be seen in some areas such as software that you kind of alluded to in your statements. it can at times justify what could be perceived as maybe a relatively high valuation.

Starting point is 00:42:06 Just to provide a little context on that, before the advent of the internet, it would not have been possible for a company to go from being invented to having hundreds of billions of dollars of profitable cash flows in the span of a couple of decades or less. And we've seen companies do that. I mean, the netas, the Googles, in the span of, you know, just a few decades or in Google's case, a little bit longer. These companies have amassed hundreds of billions of dollars in profitable cash flows from

Starting point is 00:42:37 nothing. So most of the time you would have looked at those types of companies and said, oh, this is expensive. Well, sometimes those companies can grow at rates that justify those multiples. Now, the difficulty is projecting these types of companies is more difficult than like a legacy consumer staple. But if you hit on one or two of these, it can make up for a series of moderate misfires elsewhere. And I think in terms of valuations, you also have to be certainly careful in looking at valuations by sector because it's perhaps counterintuitive. But sectors like semiconductors where there's inherent cyclicality, often they're the most undervalued when their cash flow ratio, their near term price to cash flows is the highest.

Starting point is 00:43:29 So saying, I don't pay that much attention to what is going on in the overall market in terms of, you know, what is the headline, you know, PE or price to cash flow. I'm looking at more individual situations and things like that. 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

Starting point is 00:44:11 GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at Vanta.com slash billionaires. That's Vanta.com slash billionaires.

Starting point is 00:44:48 Ever wanted to explore the world of online trading but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&B 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem.

Starting point is 00:45:33 Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not soon as you. for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a $7.

Starting point is 00:46:22 97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com

Starting point is 00:47:04 slash income. This is a paid advertisement. All right. Back to the show. You alluded towards the start of our conversation that what the Romans did 2,000 years ago are the same things, a type of policy decisions, policy makers. are making today. And you see, you know, these cycles of human nature playing such an important role in human nature generally doesn't change. And, you know, people aren't going back in learning

Starting point is 00:47:33 from these past mistakes. And, you know, human nature is just kind of underpinning what's going behind these decisions. And I'm super curious in studying all these periods, what are some of the most universal things that are probably the most important to take away in studying all these market crises. Yeah, that's a great thing to bring up. And I talk about that at the end of my book. I include a list of, you know, what I think are some important takeaways. And I think perhaps the most important, if not one of the most important thing is I never attempt to time the overall market because like, and this happens during every crisis. Like people get scared and they sell out at the bottom during these market events. And then they miss all the returns for the next

Starting point is 00:48:19 20 years. Like, the statistics on the way the returns work over time are just staggering. All of the returns that an investor earns are just in the few days that nobody expects the markets to go off. Like, I included a data point between 1930 and 2020, if you had just stayed invested in a S&P 500 equivalent over that period, you would have earned roughly a 17,700% return. But if you were an investor who just set out the 10 best days of the market per decade over that period, you would have earned a cumulative 28% return. So if you missed the few best days, you earn nothing in equity. So you can't, if you were going to invest in equities, you can't panic when these types of things happen

Starting point is 00:49:10 or else you shouldn't be invested there. You won't earn anything. And my book goes through various implosions. and in the banking sector across countries in timelines. And at least to me, that's why I choose not to seek out businesses that require leverage to earn a return, just because they go bust quickly when things go south. And aside from banking, some other sectors where this is applicable, include investment banks and property developers.

Starting point is 00:49:39 And I don't know if you've seen what's been going on in China the last few years, but the property developers have a lot of them have been going bust because of the inherent leverage. And then I have a lot greater appreciation after, you know, going through this exercise for businesses that require little in the way of capital to run their business. And that's because capital-like businesses can quickly adjust their cost structure in times of crisis. And this was really important during the recent COVID-19 crisis because companies weren't bringing in any revenue for a period of time. So if you're not bringing in any revenue and you can't adjust your cost structure, that's a problem. But these types of things do happen.

Starting point is 00:50:20 And that, to me, is certainly important. Look for businesses with strong pricing power. That's because businesses with pricing power can push through price increases in times of elevated inflation. So if you have crazy scenarios, you know, really high inflation, if your product is important to a consumer, you can charge more for it. Country diversification is important, particularly after studying, you know, Japan where nobody earned a return in equities and bonds for over 30 years. And I also cited a few other examples. South African and Zabu and property at various times, you would have had your assets confiscated there. So I think country diversification is important.

Starting point is 00:51:01 And I think it's also important to challenge conventional wisdom. From my studies, it's people generally tend to assume what's happened recently or in their lifetime. is what always happens, but it's possible in a longer historical context. What happened recently could be the aberration. So it's important to at least understand that because then if you see some structural shift, you can understand, you know, is this actually a weird thing? Maybe what was happening recently was out of the ordinary. And I think, like citing a recent example, the extreme monetary policy of the last 15 years,

Starting point is 00:51:39 that was weird. But like people that grew up in that, they would have said, oh, this is, this is normal. You know, free money everywhere for a really long time, that's, that's normal. But if you've studied markets over a long time, that's not, that's not normal. And just to wrap this up, I think studying all these things and being able to say, we've seen this before, you can better construct an all-weather portfolio that can withstand extreme shocks and be more comfortable operating in a crisis when it does strike. Because fundamentals usually go out the window when it does happen and you can take advantage of some opportunities.

Starting point is 00:52:16 I love how you mentioned. The recent period could be an aberration, just like a total outlier in the broader data set. And it reminds me of the chapter in Morgan Housel's book, The Psychology of Money. I believe the chapter is titled, No One's Crazy. And essentially everyone, not everyone, but like a lot of people, invest based on their experience at some certain point in their lives. So like when you think about someone that lived through the Great Depression, well, there's probably a good reason why they

Starting point is 00:52:44 are so financially conservative. They can see what can happen in these more extreme scenarios. And you can see, oh, well, this person's going out and taking crazy risks buying profitless companies or whatever else that they say are going to triple overnight. Well, it's like, oh, well, you know, they've seen that in their experience in the markets and they think, you know, of course, it's going to happen again and having that recency bias. And I think it points to just why it's so important to, you know, read these books and read about these perspectives of others and what's happened in other countries and just learning about Japan, for example, and how their market's gone nowhere in 30 years. Like, it just really humbles you. And like, again, like I mentioned earlier,

Starting point is 00:53:24 just a reminder to tamper expectations. So, Brendan, I also think it's important to touch on the energy crisis from 1973 through 1980 in the United States and how that may be relevant to the U.S.'s current situation today. So talk to us more about the energy crisis from the 70s and how this may or may not have parallels to today. Yeah. And I'll just walk through what happened in that period because there are a lot of parallels and some things that are directly applicable to what have happened the last few years. off, there were a few important differences between today in the 1970s. And for one, the global energy market looks a lot different. The United States is a much bigger energy player today. And

Starting point is 00:54:12 that's because energy production in the U.S. really took off with the rise of shale oil. I think it was about 15 years ago. But the other key difference today relative to that period is that government balance sheets are in much worse shape than they were at that time. But the 1970s was in era that most people think about as a stagflationary area. And stackflation is a period of low growth and high inflation. And during the years, 1973 and 1982, there were three technical recession. So the economy was constantly in and out of recession. But one of the parallels that is strikingly similar to today, in 1973, Syria and Egypt attacked Israel and what would become known as the the Yom Kippur war. In light of what's happened in the last few months, the parallels are

Starting point is 00:55:05 obvious. But at that time, this really was a sent shockwaves through the oil market, given OPEC's huge influence at that time. And this was before the United States became a huge energy player. But in 1973 and 1974, over that one year period, the price of oil went from 250 to 1150. And I think that today there's been a more muted impact on oil owing to the more diversified sources. Like the United States can ramp up production if needed. If OPEC was the only game in town, I think that you may have seen something similar to this rise that we saw. But at that time, there were widespread oil shortages. And governments responded with price and wage controls, which I document throughout my book.

Starting point is 00:55:56 and that always increases inflation. And another important topic that's relevant to today is labor unions. And at that time, labor unions, they were in full force and that was putting upward pressure on inflation. And when President Reagan, in early 1980s, he launched a well-documented campaign against labor unions in an attempt to stifle inflation. And most people think that that was really the start of the long-term decline of labor unions that only really has retrenched in the last few years. And we've seen some wage

Starting point is 00:56:31 inflation, I think, at least if it persists, that's going to be structural. But Reagan also, he attempted to stabilize energy prices by deregulating the price of oil. And that led to the non-OPEC producers. They were then incentivized to produce oil. So they ramped up production. And, yeah, I don't think that that should be particularly surprising. that they were then incentivized to do so. But to wrap up this scenario in the 1970s and 1980s, I'd be, I have to at least mention Fed Chairman Paul Volcker, who is very famed people always cite Volcker these days because he raised interest rates

Starting point is 00:57:12 to 20% in 1981 to stamp out inflation. And all this was ultimately successful. And by 1983, after a decade of elevated. inflation, it did eventually come down to about 3%. Since you mentioned the wage inflation potentially being structural in light of, you know, the recent rise of labor unions, I'd love for you to touch more on that and why you, in your book you talked more about wage inflation instead of just inflation in the broader economy in general.

Starting point is 00:57:47 I'd love for you to talk more about that. Yeah, it does seem like at least one element of inflation. inflation appears to be somewhat structural, and that is tied to the labor units, as we just noted. But also, it does seem to me like some of the globalization in the last 30 years is in a degree of structural retrenchment. And so to the extent that we are having, like, more manufacturing in the United States, well, people here are going to command way higher wages than, you know, people making goods did in China for the last 30 years. So to the extent that a decent amount of that is structural, it's inevitable that that element of inflation will remain elevated, at least relative

Starting point is 00:58:40 to what it has been for the last 20 years or so. And I think that I'm pretty confident that a portion of that is structural. It's difficult to say how this is going to play out with what's going on with the unionization. I mean, from a lot of younger people's lives, I mean, unions weren't, were not even relevant at all. And it's really just in the last several years that we've seen this. And to the extent that that persists, that will also, that will be a structural tailwind upward on, on inflation. I don't, I don't really know how all that is going to play out. But there There are some counter inflationary forces as well. You're seeing a lot of countries or a lot of companies like big companies like Apple now investing big in India. So you are going to see, you know,

Starting point is 00:59:31 some manufacturing and jobs shift there that are from China and they have low cost of labor. And we also have, you know, ongoing technological innovation that is going to continue to be a deflationary force. But at least to me, it does look like that some of this wage inflation is going to be structural. And since you manage money professionally, I'm curious if you could paint some color on maybe business models that, you know, what you sort of look for in businesses in light of higher wage inflation or maybe just potentially higher inflation in general. You mentioned the pricing power earlier. I'm curious if there's anything else worth highlighting here. Yeah. Yeah, I think during periods of elevated inflation, the companies that tend to perform the best are, as you alluded to, ones that are able to pass the cost along to the consumers.

Starting point is 01:00:23 And, you know, inversely, the ones that do the worst are the ones that are not able to because then their profitability is eroded. Like the last few years, you've seen sectors like the lower quality retailers, like things like that. They're not able to pass costs along. They go from a really low net profit margin to a loss really quickly. And that's what always happens. But there are sectors where their product is really important to people and they're able to pass along those costs. I mean, some of the higher quality consumer companies like Pepsi, like they've been

Starting point is 01:00:58 raising prices like crazy the last few years. And their consumers have continued to buy their products because it's apparent from their behavior that they don't view, they view the switching costs as being high. So that's how I think about it from a business context. I wanted to switch to a more unrelated, broader point here. One thing that stands out when looking at today's markets is the U.S.'s interest expense, just exploding higher, becoming one of their biggest expenses in light of interest rate increases and a lot of the debt that was issued at near zero is now rolling over and being issued at 4, 5 percent. And that's making a huge, huge impact given where U.S. debt levels are today.

Starting point is 01:01:49 I'm curious if you have a view on, you know, in studying these past crises in history and past civilizations such as the Roman Empire, if you have a view on the longer term implications of, you know, this exploding interest expense that, you know, it's now in the trillion dollars. range. The implications for what's going on with the deficits and interest as a result, particularly tied to the higher interest rates now, they're enormous. And to provide a baseline for this, what we're walking into is a situation where mandatory spending in the United States, which includes things like Social Security, Medicare, that made up 61% of federal spending in 2019. And this figure in 1970 was only 30%. So when we factor in the higher interest expense,

Starting point is 01:02:41 we arrive, at least the way things are currently constructed at a scenario where 100% of the federal budget is now going to things that have nothing to do with investing for the future in terms of growth. So we're really left with these options. And I note these in my book. We can, try and grow our way out of these deficits, which is what happened to a large extent after World War II. But where we are now, that's much more unlikely because population growth now is much lower than after World War II. So that's going to make it a lot harder. You can't just have ongoing productivity gains at 10% a year in perpetuity. That's just not a realistic expectation. One of the other options is to significantly raise taxes. And I don't think that there's

Starting point is 01:03:30 there's really a doubt that at least to some degree this will happen, but this will, in the process will also hinder economic growth. And one of the other options is we can have sustained cuts to federal expenditures, but at least from what I've seen, this really is almost never an option because sustained budget cuts are always politically unpopular. And politicians don't really have an incentive to do this because usually when things blow up, it's after they've already left. And So it's not on their their watch. I don't know if you saw in this past year when France tried to raise their, they introduced a bill to try and raise their retirement age from 62 to 64, which is, I don't think that that should have been a very big deal, but riots and protests broke out across the

Starting point is 01:04:20 country. So once you give someone something, it's difficult to take that away. And then the last option, which we've done a lot of in recent years, is to print more money. And that doesn't resolve any of these problems, but it does kick the can down the road. And I don't have any doubt that will continue to do that. Well, Brendan, it's a very interesting book. I'm glad I had the opportunity to read it and bring on the show to discuss it. Before I let you go, how about I just give you a chance to share any parting thoughts that you feel that are important that we haven't touched on today. Yeah, I don't know that I have anything that we haven't already touched on other than I think it's important for people to learn from the past. And I hope that, you know, our listeners

Starting point is 01:05:10 out there, you know, are constantly trying to learn from history and applying that to today in the future. Awesome. Well, before I let you go, I want to give you a chance to, you know, let the audience know how they can get connected with you and find out more. out the book. Thanks, Clay. So you can find markets and chaos, a history of market crises around the world. If you just search on Amazon, it's also available through my publisher, business expert press, along with various other retail channels.

Starting point is 01:05:41 And if you want to connect, you can find me on LinkedIn. You can just search Brendan Hughes, comma, CFA, and then type in, you know, Lafayette investments, my company or my book, Markets and Chaos. And I'm sure I'll come up. Wonderful. Well, thanks again, Brandon. Really, really appreciate it. Thanks a lot for having me, Clay. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network

Starting point is 01:06:10 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 Podcast. Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP589: Stock Market Crises & Bubbles w/ Brendan Hughes

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.