We Study Billionaires - The Investor’s Podcast Network - TIP591: Currencies and Debt w/ Lyn Alden

Starting point is 00:00:00 You're listening to TIP. In today's episode with fan-favorit Lynn Alden, we talk about currencies, debt, inflation, and how to invest in an uncertain world. We discuss why companies like Berksa Heatherway take on debt where they could be without it, and how to think like a micro-investor in a world that might at a glance seem to be rapidly changing. Lynn Alden is a master of breaking down complex macroeconomic concepts for all of us and making them relevant, regardless of the investment strategy you might be following. And if you're unsure about what a debt restructuring is, the relationship between world

Starting point is 00:00:34 conflicts and currencies, and how to best take advances of inflation, this is most certainly not an episode you want to miss out on. 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. You're listening to The Investors Podcast. host, Dick Brotherson, and as you can hopefully tell from my voice here, I am, I'm very excited because I'm here with someone who's really, really special, and that is Lynn, how are you today?

Starting point is 00:01:20 I'm good. Thanks for having me back. So, Lynn, you recently published Broken Money, and we already talked a lot about that, but if you'll forgive me, I would like to start talking about your wonderful book here at the top of the interview. You know, this is already my favorite book in 2023, And being a micro investor, you know, I was surprised to see how excited it was for a book that's so macro-based. And I would say I haven't been as excited about a book in macro since Delio's book, The Changing World Order, which in case someone's like, what do you mean? It's just my way of praising a book. But anyway, so Preston, I interviewed you about broken money. And this was the first part was back on episode 574.

Starting point is 00:02:01 But before you jumped on the call, you know, Preston and I were like, I don't know, talking for, few minutes before then. And Preston said to me that he felt that you did such a wonderful job outlining why Bitcoin was the solution to the fear currency issues we had right now. And then you jumped on the call and our conversation ended there. But to me, I found that to be pretty interesting because I read your book three times now. And it's just getting better and better at the time I read it. And I concluded all three times that Bitcoin is not the solution. And so this is not a question of discussing whether or not Bitcoin's I actually try not to talk about Bitcoin for the rest of the episode.

Starting point is 00:02:38 But it told me about the potential confirmation biases that I might have had going into the book because I haven't changed my mind going into the book, even though I learned a lot. My overall conclusion was the same going out of it. And perhaps 99% of the listeners also have confirmation bias one way or another. And so I guess this is my way of asking you, whenever you wrote the book and you might have a thesis going into the book, how do you find the right sources to go to? There might be some sources that are more in line with what you expected to find.

Starting point is 00:03:07 Perhaps there are not in line what you expect to find. So how did you balance the process and stay unbiased? I show the work. And I say, okay, here's all the logical steps and pieces. And so if someone's following along and let's say, you know, I'm seven steps in and they disagree with step five. And they start going in a different view from there. They might disagree with the end of the article, but they still learn a lot from the article. because now they, if anything, I've refined their argument against mine, right?

Starting point is 00:03:36 That they have a clearer picture of their argument or that they can articulate a scenario better than they could before they read the article. So one thing I try to do is basically say, not just here's my view of the problem, but here's the whole framework that I'm going in with this. And then it's kind of like open sourcing your research, right? Someone else can say, okay, well, I agree with this 80%, but then I diverge here. And so that actually helps me as well. And so that's something that the book does on purpose, which is just like a, you know, it's the past of money, it's the present of money and the potential future of money. And purposely, I don't put Bitcoin in the title. I purposely, you know, other than brief mentions, it doesn't come up until the final third of the book. So the first, you know, the books divided into six parts. The first two parts are most of the history of money and banking. The middle two parts are mostly kind of the way that the current system is constructed or, you know, recent memory, basically within our life.

Starting point is 00:04:31 time, our parents' lifetime is what the system looks like, how it functions, what are some of the pros and cons of it. And then the final two parts are more about the future of money. And even like the last part is mostly not even money. It's mostly other things that are kind of related to money. So really, you know, Bitcoin only comes up in that final third for the most part. I'm conscious of the fact that I have audiences from many different camps. There's people that primarily follow me for equity research, people that follow me for macro research and are not really big fans of Bitcoin or other digital assets. And then there is a big component that follows me because they like Bitcoin,

Starting point is 00:05:08 and they found my work. And then they actually go the other direction. They learn more about macro after already having liked Bitcoin a lot. So there's multiple different audiences that I know are going to read the book. I also write the book knowing that there's people that don't know my work at all. They could be academics. They could be someone from another country. There's all such people that read the book, not big for me with my work.

Starting point is 00:05:30 And I want it to just, the whole piece has to kind of stand on its own two feet. And so whatever conclusion someone takes away from the book, I want them to say, okay, this was a good book. It was well argued. It was evidenced. It provided a lot of context. And the book doesn't even make any like firm claims of what's going to happen. It kind of shows the branching outline of where I think things are going and why I think that one branch is helpful to support. But basically, I think the reader will take away from that what they will.

Starting point is 00:06:00 I think that there's a huge element of that. And if we can use that as a segue into my next question, because whenever I was asking you that question, it's because I'm thinking a lot about it for my own primarily equity research. But I think it's an important topic to discuss regardless of what the views are on whatever kind of asset class. But one of the challenges I face whenever I'm looking at a stock is that the both thesis are always more plentiful and they're more thoughtful than the bare thesis,

Starting point is 00:06:29 generally. And of course, there are good reasons for that. Because if you think that a certain stock is overvalued or you're just not interesting, you know, you very often you just quickly move on to another stock. And so unless you want to make a living out of being a short investor, which is just brutally tough just because your odds are against you whenever you're showing things. But even if, like some of those people, of course, they would give a really thoughtful short thesis, which is perfectly fine. But generally, whenever you look at, you know, you I don't know what kind of stock you might be interested in and you look it up and you see all of these wonderful both these, they're just like you.

Starting point is 00:07:05 You know, you agree and you all agree that you're all super smart because you're all bullish on that stock. How do you, because I know you also invest in equities, but how do you stay unbiased and explore the bare thesis of your long positions, perhaps specifically about equities, but we can talk about any other asset class if you want to. Yeah, key thing I do is I purposely go and seek out disagreeing views. And so it could be on seeking alpha. It could by any other platform.

Starting point is 00:07:35 It could be different analysts out there. If there's a stock that I'm forming a bullish thesis on or that I'm doing like a checkup on it to see if I still have a bullish thesis on it, I will purposely go out and say, okay, what are the bears saying? What is the smartest bear article I can find on this? Basically, it's steel manning your opposite opinion. because my goal is not to find people that agree with me, it's to make good returns. And so I need to hear the critical view of whatever this is, especially because any bullish thesis will come with

Starting point is 00:08:06 risks or, you know, what will invalidate this thesis? And reading a bare article, one, it just might make you not bullish anymore if they're right. Or two, at least you say, okay, so if these, I don't agree with this article or the probabilities of this article, but if these problems start to materialize, I now define them better and I know what to look for if the bear's thesis starts to manifest itself. And so my risk analysis section is now improved by the fact that I'm familiar with the bear arguments. Then another part is just having the humility to change your mind.

Starting point is 00:08:41 I mean, the most famous, the most successful trader of all time is arguably Stanley Druckenmiller and his biggest superpower is that he can just change his mind on a dime when new information comes in. He'll like, okay, he'll have a view. And then as things start to kind of shift or something new happens, he'll fully reset and be like, okay, was long bonds and now I'm short bonds. You know, things like he can completely go the other direction. And while I'm not a, I don't, I don't, I have a lower portfolio turnover than a trader. It's still a similar mindset where, you know, just because the stock's going down doesn't necessarily mean you keep doubling into it because, you know, the thesis might just not be there anymore.

Starting point is 00:09:20 You have to kind of treat every day as a new day, whether it's equities, whether it's a macro asset, whatever the investing view might be, you always have to just fully reset and just think, if I were evaluating this today with no attachment, is this right or wrong? And with shorts, it's interesting because shorts, you know, you have to be more careful if you short of stock. And so you use kind of like stop losses. You define your point where you get out and then let it run and then maybe reassessed after it's done running. And so, for example, there were a couple times where I shorted Tesla because I had a case where, okay, they're going to, they are going to sell more cars, but they're overvalued and they're going to have tough time sustaining profitability.

Starting point is 00:10:04 And it's funny because I would read the opposite opinion, which is like ARC research, right? So they had very aggressive price targets. They were talking about like a flyer. fleet of robo-taxies in a couple years. And the funny thing is that my fundamentals were right. So I was like, no, we're not going to get robotaxies by that date. And we didn't. And they had all this thing for like robotaxy revenue and insurance revenue. And I was like, no, none of that's going to materialize in this time horizon. And they sold about as many cars as I would have guessed. But the funny thing is the numbers favored arcs view. So they the fundamentals were off, but the actual stock price reached their targets. And so when

Starting point is 00:10:41 Tess has started just hitting the levels that I had predefined as getting out of the position. I did. I got out of the position and the stock price ran so I made sure not to lose any money on the trade. And it did his thing. And it's like, well, you know, I don't really agree with Tess's valuation, but the market's going to do what the market's going to do. And I just have to step aside and just kind of let that play out. You know, another one was after banks fell a lot last year, which was before the March 2023 banking crisis, I started to get more interested in them because they were pretty cheap.

Starting point is 00:11:15 And everybody's talking about like a banking crisis blow up. And I view a lot of conditions as different than 2008. So there's a lot lower risk of major credit issues, at least for the big banks. But there were a couple of things that were different that kind of made some of that more pressure that I would have guessed, which was that the switching costs between banks are a lot lower now than they were in prior cycles. So if you look at most interest rate cycles, when the Fed started, raising rates, normally bank deposits are really, really slow to adjust because, you know,

Starting point is 00:11:47 people are kind of just locked into their bank and they're not really kind of seeking out alternatives too much. And so basically there's like a moat there. There's a stickiness there. And so they get the profit from that spread for a while before rates start even, you know, slowly kind of inching up. But in the age of mobile banking and with the sheer size of the rates move, basically, industry is kind of more quick to adjust this. time. And then also when you have things like, you know, you can pull out your money with the software API, like bank runs can be quicker now just because of the way we do things. And so, although I still view it the case that there's not a high risk of a major kind of credit

Starting point is 00:12:25 event among the major banks, I had to reevaluate my thesis around their forward profitability and things like that. And so basically it's just, it's always approaching things, not tying your ego to an investment. And then having taken the conscious choice to seek, out the bearish view so that you can always articulate both sides, so that you're always kind of weighing the probability of which side's going to be right in the long run. You know, Len, it's really interesting that you mentioned the Druck Miller framework before, because I think that is the goal standard where you just change your mind on a dime. It's also extremely difficult to do that because we all have recency bias.

Starting point is 00:13:05 So we hear something, and then all of a sudden it seems way more important than it probably is. And so one way to safeguard yourself, which is ironically the very opposite of Drunken Miller, but if you don't have that skill set and few us do, they're also a camp of investors who forced themselves to, for example, not sell a stock two years after they made it or three years, whatever kind of limit you have, just not to be susceptible to reasoncy bias. But that has the advances of, again, not being susceptible to a recentity bias, but also has the disadvantages of there could come something that would just completely destroy your thesis.

Starting point is 00:13:38 And in this case, you're just still stuck, you know, holding the back. So it's just very interesting to hear how you went about that. Yeah, there are research that show, for example, that, like, some of the best performing brokerage accounts are people who have, like, got locked out of their account or have, like, passed away. And, like, the stocks just keep, you know, doing their things because people have a tendency to over trade to sell the lows, to buy the highs. And if you just kind of take up that behavior, things often work out, you know,

Starting point is 00:14:05 that could certainly work well if you're managing position size carefully, you know, if you say, okay, I'm going to get 50 stocks, 2% each, you know, and I'm going to make sure I don't sell for two years and I'll re-eval the thesis then, because the worst case scenario is that, you know, a couple slices your portfolio do very poorly. Whereas if you're taking more concentrated positions, obviously you have to watch that close, you have to be more dynamic with your positioning. So it really kind of comes down to investor temperament, portfolio strategy, and things like that. But the point is to always be objective and to, like, not just accidentally come across the views that disagree with you, but make it part of your checklist that you actively seek out

Starting point is 00:14:42 views that disagree with your thesis so that you're not blindsided by them. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing

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Starting point is 00:19:08 You know, for example, whenever you had a gold standard, you had to finance a war by, say, increasing taxes, lowering your expenses, which are things that are not that popular to do. And so not being on a fiat currency can give you an incentive, perhaps not to a war. But what we have now is in a situation where you get taxed through inflation. And so the expenses will be paid by money printing and we all get taxed through that. So you have this wonderful argument for a non-fayette monetary system, which is you have fewer wars. But my question is more about incentives. If we have this world, what would prohibit a country from rewording

Starting point is 00:19:48 back to a fear currency while the war was forced? Because it has happened. multiple times in the past. Because what we've also seen is that the winning side can then impose their monetary system on the defeated country after the war. Yes, I have two main kind of answers to that. And they kind of come across different lines. So one would be that the whole reason why that dilution works is because it's non-transparent. So, for example, when we went into, when the U.S. went into the Iraq war, we didn't pay taxes

Starting point is 00:20:21 for it. We didn't change anything major about our money system for it. And just over years and decades, we've racked up trillions of dollars of kind of dilution, industry expense. But now when people talk about the fiscal budget, the fiscal deficits and things like that, they're always talking about Trump and Biden, all this recency bias. Not talking about stuff like, you know, decisions 20 years ago that compounded into where we are now, right? And so it's kind of like that obfuscation and delay. Now, if you had to change the monetary system to go into the war, that would violate the whole purpose of trying to do this opakly. It'd be more in your face, right? So anytime a country has to kind of change this monetary system and say, okay, now we're going to

Starting point is 00:21:05 revert to Fiat and dilute people, well, now they get a cost to that war that they weren't paying before. So it's kind of like a change that is actually definable and discussable, whereas we didn't really have that. The other one would be to point out that just technology is challenging now. It's a different environment. And so, like, a lot of countries are having trouble, and I think this is only going to accelerate in the next five, 10 years as the liquidity of these things gets bigger. But countries now have a tough time imposing their own currency on their own people. I mean, Lebanon and Argentina and Turkey, if a currency gets bad enough, people now have a lot more options to escape from it. And so, you know, money is like a market good, in a sense,

Starting point is 00:21:45 especially with globally. But that has been kind of content. by the fact that until recently, technology was able to silo those pretty efficiently. So if you think about a country, there's really only kind of two main ways to get money in or out of it. One is physical airports, ports of entry, but you can only bring so much cash or gold with you. So you're very tightly controlled there, in or out. Number two would be bank wire transfers. But again, they're, you know, they're all government controlled. Of course, there's fintech things, but they're just, they're overlays on top of the banking system anyway. And so all of that is control. There's two major ways to get money in or out of a country. And so, for example,

Starting point is 00:22:23 like I know a Egyptian videographer, and he does work for foreign customers, and he charged in dollars, but by the time the money hits his account, it's an Egyptian pounds. There's a financial barrier there that is, you know, it's hard to access these other monies in these environments. And so let's use Egypt as an example. If you're one of the 105 billion people in Egypt, you're in this, a little currency monopoly, and the money supply is growing by 20% a year. And it's not that they're fighting wars, but it's instead that they're doing major infrastructure projects. Like, they're building whole new cities that is kind of government decreed, right? So it's not really based on market forces. It's based on government decree. So they're getting external debt to do it.

Starting point is 00:23:07 They are diluting the money supply greatly to do it. So people are kind of paying for it without necessarily being taxed for it or really. It's just kind of constantly draining. So Everybody in that country has to try to keep up with the money supply growth that's happening. If you're not getting a 20% raise every year, if you're not a small business raising your price is 20% a year, if you're not a landlord raising your rent on your tenants 20% a year, you're getting diluted. You're becoming a smaller share of that monetary network and you're probably losing, say, dollar global purchasing power if you're not kind of aggressively trying to keep up with that dilution treadmill that's happening. and until pretty recently there's not that many ways to get out of that currency bubble.

Starting point is 00:23:50 Like I actually, hold on, I have, like, here's an Egyptian pound, right? 200 Egyptian pounds. And this is, for all the purposes, a casino chip in the sense that outside of Egypt, there's almost nothing I can do with this. I can't buy goods and services with it almost anywhere. And even finding someone to convert it into local currency would be very hard in most places in the world. Like, I'm in New Jersey.

Starting point is 00:24:14 I wouldn't even know where to begin trying to get this into dollars. And even if I could, the fees and the exchange rate would be, like, awful. It's got extremely low salability. It'd basically be about as hard as converting a casino chip arguably harder. It's like if there's a casino in Singapore, you know, it's like, if I had a chip here, what am I going to do with it? That's kind of the situation. But what things like Bitcoin and stablecoins do is they go around those prior gateways.

Starting point is 00:24:40 And so, for example, if there's a Nigeria. and graphic designer and I want to pay her, she can show me a QR code on a video call like where we're having now, where she can send me an email or a DM and I can pay her and it can be in whatever currency she wants. It could be in Bitcoin, it could be in dollar stable coins. It could be in gold-backed stable coins. Those exist. It could be, you know, whatever kind of global competition money she wants, I can actually send it to her and she has it now in a way that goes around her local banking system. And so we see increasingly, Argentinians, are turning things like stable coin and Bitcoin, Turkey is doing that, Lebanon. I mean, they

Starting point is 00:25:17 basically hyperinflated and people kind of just forcibly dollarized. And so, you know, if we imagine a world where from the beginning, if we could just like teleport gold to each other, you know, if I could just mentally think and teleport gold to you, it would have been very hard for governments to ever impose fee of currencies on us, right? Because fee of currencies materialized because they were solving a problem. So the banking system fixed a lot of the shortcomings, of gold, which was its verification, its portability issues, it's securely keeping it. So we put our gold in the banks and it all got centralized and abstracted in, you know, lever 20 to 1. And then when that all blew up, they just said, okay, it's not gold backed anymore, but keep using the bank ledgers.

Starting point is 00:25:59 And so it's kind of like a series of steps one at a time, most of which we're solving a problem, and then we got rug pulled. Whereas if from the beginning, if gold was just effective enough that we could just kind of beam it to each other, it never would have materialized in this via currency sense. And so the way I would argue that going forward is that now that technology is good enough that people can send money to each other. And again, it could be Bitcoin, it could be stable coins, it could be gold-backed stable coins, whatever money is winning on the market in a global sense. People can send that to each other now. They can self-custody it if they want to pretty effectively, pretty cheaply and pretty securely. And it's hard for government, either a local

Starting point is 00:26:38 government or a foreign government to impose that on people. You know, basically that they now have multiple tools to go around those in a way that we're not here before. And so I think both in terms of, I think if you give this another five, 10, 15 years, people will become increasingly normalized to the idea that they can access global assets now in a way that they could not until pretty recently. Yeah, it's definitely a new world that we're in. And then we are increasingly in a debted world.

Starting point is 00:27:10 And one of the arguments that I've heard you talk about is that we have many credit worthy borrowers that have incentive to take on debt, even if they don't need capital. And simplistically, we can think of this as if you can borrow at, say, 3%, I don't think you can do that anymore, at least not in the States. But if you can borrow at 3%, and let's say that your currency and, in turn, your debt are debased by, say, 5% a year. you have incentive to take on debt. And even for us who were raised in the church of Buffett and Munger,

Starting point is 00:27:44 and we're taught not to take on debt, Berksie Hallewey itself are taking on billions of billions of dollars in debt, and they could easily operate without, you know. It's not too long ago they took out billions in Japan and paid next to nothing for that and then bought Japanese equities because there are no reason not to. But if we take it back here to us as retail investors, how can we best leverage the debasement of currencies to our advantage, for example, to taking on debt in our portfolios?

Starting point is 00:28:16 So historically, over the past 40 years or so, investors and companies have been rewarded by taking on moderate amounts of debt. And so you've generally been punished if you've taken on no debt or if you take on so much debt that you get over your skis and get liquidated. So entities that can successfully manage that middle area, that's a lot of money. that's kind of how this has been optimized. That's who wins in this system is if you have a long-term low interest short on the fee of currency and use it to buy better assets and structure that well, that's been the winning

Starting point is 00:28:49 trade. So Berkshire Hathaway has nailed that both in terms of debt and in terms of their insurance float. That's another type of leverage in a way. That's one of the superpowers that they've had. But even if you look at their portfolio, so Berkshire Hathaway has its own leverage, but then it owns the portfolio of stocks, including Apple, Coca-Cola, American Express, Bank of America, all these different companies, Chevron.

Starting point is 00:29:18 Most of those have significant debt as well. And we think, why does Coca-Cola have debt, right? It's a company that's more than a century-old. They've been profitable for, you know, longer than our grandparents have been alive. Why do they have debt on their balance sheet? And the reason is because it's an active choice. It's basically a fee of currency short. It's a cheaper part of their capital stack than pure equity.

Starting point is 00:29:42 And so a company like Coca-Cola can borrow for 10 years, 20 years, 30 years at low interest rates. And they can, you know, basically they can use it for share buybacks or dividends or business expansions. And they basically have this kind of permanent long-term short on their balance sheet. So one is you don't have to have your own leverage to do that. You can own entities that are themselves just taking advantage of that going forward. Now, I think that the next years and decades are going to be a little bit different in this regard than the past 40 years. I think the cycle is getting more challenging. I think a lot of the wind in that position has been, you know, taken out now. There's also, I mean, you know, any homeowner that, for example, locked in a low

Starting point is 00:30:25 fixed rate mortgage and refinance whenever rates went down has. been very much rewarded in the current system. That's another way that the average retail investor can do it is you, okay, you don't buy stocks on a margin, but you buy your house on 80% leverage, which is just like a normalized leverage in society. It's like the socially acceptable type of leverage. That's how our society structures is normal to do that. And if you, you know, if you buy your house carefully, if you don't buy in a bubble, it has been the smart move to term it out for 30 years and leverage it, you know, 5 to 1, like 20% down. that has been a good trade.

Starting point is 00:30:59 There's still some global opportunities, but they're generally hard to seek out unless you're tied to that space. So, for example, we just bought an Egyptian property, and it's financing works differently there than in the United States or in Europe. But basically, it's a, you know, money supply is growing there by 20% a year. And we have a seven-year payment term at like a 3% interest rate. So we have a seven-year short on the Egyptian pound that's growing by 20% a year. and it's kind of just a quirk in their financing for how that works.

Starting point is 00:31:29 It's like developer financing. It's like basically part of them trying to move the bills that they've constructed. So if someone in the country is selling a house and wants to buy this house, they would probably not take that deal. They don't want to hold their equity in other things. They want to transfer their equity from one house to another house. But if you're a foreign buyer that makes your income in dollars and has significant dollars not made assets or, you know,

Starting point is 00:31:56 globally priced assets, being able to go in there and do a seven-year kind of 3% short, the currency makes a lot of sense in a way that wouldn't necessarily make sense for local investors. And so there are opportunities out there to still kind of do this type of thing. Basically, whenever you have an opportunity to have a long-term, non-callable short on a fee of currency at an interest rate that is well below the typical money supply growth of that. And you can then deploy that in something that's, you know, got a pretty high chance of beating that very low hurdle. It does make sense as long as you are judicious about it.

Starting point is 00:32:34 It's not that I like that aspect of the system. And it's one of my criticisms with the current system is financial engineering is generally a more profitable thing to do than real engineering, right? That's partly why the U.S. has become so financialized. If you get an engineering degree, it often makes more sense to take all that quantitative knowledge and go to Wall Street than it does to go to Silicon Valley. And it shouldn't really be that case, but that's kind of the world we've been in, at least in this kind of 40-year declining, you know, this kind of 40-year period of

Starting point is 00:33:08 disinflation, 40-year period of the system we've been in. There's even like small factors, like, for example, in Argentina, you know, if you're wealthier, you have access to credit cards. If you're not wealthier, you're in more of a cash-based payment situation. And so with the rate of inflation that they have, even doing things like buying something and paying for it 30 days later makes a lot of sense. But again, that's only available to people that have access to decent credit. And so all these things kind of stack up to favor those who have, you know, a lot of assets that they can lever cheaply or that they They can access global markets and pick out all these little opportunities or they can do

Starting point is 00:33:50 financial engineering, whereas none of this really benefits, say, the bottom 50%, you know, the working class, the people that are renting, the people that are just not making use of all this kind of credit arbitrage. That's a fascinating story and well thought out. And, you know, there's this irony that it's typically those who can afford debt that don't need it in the first place. And that's just one of the ironies of finance. And it's very interesting to hear about that story in Egypt that it's possible to do.

Starting point is 00:34:21 You're saying, you know, I was speaking with another friend of the podcast here the other day, Manjaparai. And he's investing a lot in Turkey. And so the obvious thing to ask would be, you know, and I think at the time, perhaps the interest rate was like, I don't know, 15% or 12 or whatever it was. And, and, you know, with inflation raging at, I think at the time, like 80% or something crazy. And so I couldn't help, but, like, ask, why don't you? just take out a long fixed loan and then just paid back with a worthless, not worthless, but

Starting point is 00:34:49 worthless currency. And he was like, yeah, they know that trick. You just can't do that. It's not how it works like we have sort of interest rate, but you can't really just go out and take out that loan. So it was fascinating to hear how things are in Egypt and how you manage to create that type of deal. So thank you for sharing. Yeah, it's a country by country basis. And Turkey, so when you're, when you're trying to run below market industry, it's like Turkey does, it usually comes to some sort of credit restriction. So, for example, they also limited, like, companies have less borrowing access if they hold a lot of foreign currency because what they don't want is to people just take out tons and tons of lira debt and then buy dollars with it, right? Because whenever you take

Starting point is 00:35:31 out debt in a currency, if it's a bank loan specifically, you're actually increasing the money supply of that currency. So you're literally shorting it and increasing the supply of it at the same time. So you're contributing to its weakness while profiting from its weakness. But that's, you know, when an industry rate doesn't make sense in a market level, that's when you start to get artificial restrictions on it. Also, you know, a thing I have in the book is that bell curve of monetary hardness and leverage. And so basically, if you're an environment where money is super hard, right, let's say it's a gold standard or a future, maybe a Bitcoin standard, whatever, if there's a very hard monetary unit, the borrower incentives for borrowing in that currency are

Starting point is 00:36:12 limited, right? You'd only borrow in it if you have a very high rate of return thing you want to do with that money. Maybe you want to get a degree that's going to pay you a lot, so you'll take it a little bit of debt and you can pay it back quickly. Maybe you're doing a business expansion that you expect like a 30% internal rate of return, so you're willing to borrow a few years, but you wouldn't just have like debt as a permanent part of your capital structure in a very hard money environment. On the other hand, in the other end of the bell curve, if money is like Argentina or Turkey, where it's constantly devaluing, lenders normally are not going to give you like very long-term

Starting point is 00:36:49 lending because they don't know what the courage is going to be like. So a lot of financing gets shorter term. And basically it's just the borrowers would love to borrow tons of it and short it, but the lenders, of course, are more careful with how they're going to do that. And ironically, it's the middle of the bell curve where we get most of the debt because, you know, borrowers are happy to borrow it because it's, you know, it's, you know, a dollar the euro, the yen. You know, they're not inflating away as fast as the Argentine peso or the Turkish slier, but they are inflating away relative to most hard assets or most equities. And so various entities want to borrow them. And then also various entities want to lend them, including for pretty long amounts of time, as long as they have access to an even cheaper funding rate. and can make some small amount of spread. And so that's how in these systems, we build up maximum leverage is by having that slowly devaluing unit of account.

Starting point is 00:37:42 That's neither too hard nor too soft. But then the downside of that is that after many decades of that, we build up such high debt levels that we have, you know, potentially our own instability event. Basically, that multi-decade period of stability, ironically then leads to a period of instability because it's only because of that stability that we've built up so much leverage to begin with. Yeah, there are so many ironies whenever it comes to currencies. And, you know, there are so many people in our space, Lin, who are talking about that debt must be restructured. And so if we're looking through the lens of euros or dollars, our listeners have many different types of debt.

Starting point is 00:38:21 I'll imagine a lot of them have a mortgage. Some might even invest in various securities using leverage. and I'm sure there are many who have something in between. So whenever we hear about debt restructuring, what does that imply and should investors who feel comfortable servicing their current debt be worried about it, debt restructuring? So I think when we talk about debt restructuring, most of it's about the sovereign level, like how our government's going to deal with their debt. Because a lot of what we see in recent years and decades is that debt starts moving up the hierarchy.

Starting point is 00:38:54 And so a big thing we saw in the global financial crisis, for example, is in the U.S., a good chunk of household debt and banking debt went up to the sovereign level. You know, some of it was inflated, some of it was just outright shifted, billed out, and put on the sovereign level. And so banks became way more capitalized after 2008. And households, you know, for example, going into this whole recent inflation period, any household that had a 30-year fixed rate low mortgage and then the money supply, I increased by 40% in two years, and house prices jumped, and prices of everything jumped, and there's just permanently more money in the system now. If you had a, like, a 3% mortgage locked in on a appropriately priced piece of real estate, you've already partially had your debt restructured. Part of your liabilities were inflated away. And that's, you know, even though

Starting point is 00:39:48 they're trying to fight back now and have a tighter monetary policy, some of that is just permanent now. Like, you know, basically that even if we slow down CPI growth, we're not going to go back to the prices of things we had before. We're not going to get money supply back down to where it was before. And so that's what I mean by over these kind of C years and cycles, more and more debt gets pushed up to the cyber level. And you mentioned Ray Dalio. I mean, Dalio was a big source of research from mine, starting about probably six or seven years ago about how these long-term debt cycles play out. He's done really good work on the long-term debt cycle and how these things kind of go. And so the first type of restructuring is to kind of overtime push this up to the sovereign level.

Starting point is 00:40:32 We've also seen this in Japan. If you look at it over the past 30 years, they had basically 30 years of falling private debt relative to GDP and rising public debt relative to GDP. There's been this very slow transition to kind of de-lever corporate balance sheets, household balance sheets, while levering up the sovereign balance sheet. And so the question then becomes, well, what happens when you push it all up to the top level? And that's what it normally gets taken out on the currency, right? So basically that kind of like how the homeowner deleverage to some extent, if they were short the currency and then money supply grows by 40 percent and prices of everything, including

Starting point is 00:41:09 their house to go up, their liabilities now de-leverage relative to their house and the rest of the things in the market. You kind of eventually see that on the sovereign level, where, they can partially inflate the debt away through the currency, and it ultimately gets taken out in the cash holders and the bondholders. There are other ways to do it, but that's generally how this works. So debt restructuring is often, not always, but especially developed markets, it's often less dramatic than you'd expect because people will say, well, when is this debt restructuring coming? I mean, for the private sector, it's already come in many cases. Now,

Starting point is 00:41:45 Europe is different and Canada and Australia are different because those are very real estate focused markets. And so they still have significant household debt tied to significant property values. So it kind of comes on a market by market basis. But for example, in the United States, in Japan, kind of country, country basis, you've already had debt restructuring. And the question is, what's the next phase of debt restructuring, which is the sovereign level itself. And in Japan, you see kind of just endless financial repression, yield curve control and below negative real interest rates, as far as I can see. In the United States, we're a little bit more volatile.

Starting point is 00:42:20 We're trying to still, I think, retain the view that we're going to have positive real rates for the long term, which is just mathematically doesn't really work. But I think that we're going to probably have a similar thing as Japan, where eventually that sovereign debt just kind of gets held below. The rate of money supply is growing at a certain rate, and the industry you're getting on your bonds are not keeping up with that. And so bonds basically just keep losing value relative to other assets out there. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:46:11 So to put our listeners at ease, if they can service the current debt, they should not be worried about any kind of restructuring that would be deflationary, which everything is equal. If deflationary, they will get higher debt compared to, say, their income.

Starting point is 00:46:25 Yeah, I mean, you show it. So, for example, if you have a fixed rate mortgage, you still have to make sure that, you know, you have substantial equity compared to your, liabilities that your income that provide for those payments is secure. So, for example, if you're a two-income household, if you lose one of your incomes, can the other income support all of your base expenses, even if you have to aggressively tighten your belt, like, can you still pay for all of your key expenses? Do you have substantial investments built up that you could tap into

Starting point is 00:46:55 if need be? So whenever you have leverage, there's always a risk to it, but of course, that can be minimize by having leverage that is not recourse, right? So it's tied to a specific asset, for example, not to your entire net worth. So you eliminate the prospect for bankruptcy, even in the worst case scenarios. And then two, you just are very judicious with it. So you still have a low, low to value ratio when you consider all of your assets together, you know, that your leverage is hopefully low relative to your total assets. I think the danger comes in some of these countries that are just very, very high property values that are also highly levered. That's where I would be quite worried about because they haven't really gone through that

Starting point is 00:47:38 restructuring yet. And that's a political process. And so, for example, going into the 2008 crisis, the banks were bailed out more than homeowners were. So a lot of homeowners did lose their homes or get their equity nuked. So if you buy overvalued property on too much leverage, that's when you get into major problem. So you have to definitely avoid that mistake. But in general, if you're locked into a reasonably price property with low, low to value, I think you should be in pretty good shape.

Starting point is 00:48:08 And then going forward, you just kind of keep building your equity side. Yeah, I think the takeaway here is really moderation, because it is tempting whenever you hear about the inflation and to think, let's take on debt. And so just to summarize what Limba has been talking about here is like, yes, you can do that, but you really have to be careful about how much you're doing. it. It's really those in the middle who get rewarded. Those who don't take on any debt, they get punished and those who take on too much, they go bankrupt. Do you think, Lynn, that, and I'm sort of like jumping here to talking about technology. You know, many of our listeners have been reading Giff Booth's wonderful book, The Price of Tomorrow, and he talks about

Starting point is 00:48:48 technology being deflationary. And there are different voices out there with different takes on a most law, how deflationary it can be. But I'm interested to hearing where you're coming from. Can technology be so deflationary that the Fed cannot print us to a specific inflation target? And how would that play out? Yeah, so I'm a big fan of Jeff. I actually work with him at EgoDef Capital, venture investing. So, yeah, I get to see his kind of brilliance on a regular basis.

Starting point is 00:49:18 The short answer to answer to that is no. Basically, that because the central banks can print unlimited money, there is no deflation that they can't overcome. The key question is, what are the consequences for overcoming it? Actually, so back in 2019, when there was $18 trillion worth of negative yielding debt in the world, and we were in kind of a multi-year period of disinflation, I wrote an article called, Are Bonds in a bubble, or is this the new normal? And of course, the conclusion of it was bonds are very likely in a bubble. And I made the case that equities were expensive looking, but not outrageously so, whereas bonds were like unfathomably expensive.

Starting point is 00:49:59 And we've had, you know, the worst three years in, you know, bond market history starting and like, you know, it took another year to kind of play out. We ran into the pandemic. And then the three years after that, it just absolutely killed bonds. And one of the cases I made there, because I was, like, there was articles at the time, let me see if I can bring that article up, actually. It's really interesting case study. So there was, I was kind of doing the thing where I was like fading headlines.

Starting point is 00:50:22 Like, there was a Bloomberg Business Week magazine that's called Is Inflation Dead? And of course, you know, we had just long term of like lower, lower inflation, lower interest rates. And they were like, is inflation dead? There's another article that I quoted. It was like, inflation is dead. We've solved inflation. It's no longer a problem. Macro deflationary forces are more powerful than Central Bank monetary forces.

Starting point is 00:50:46 That was from a business insider article. It did not age well. Yeah, did not age. Another quote was that really is the headline here. Inflation no longer exists. Inflation has been solved. We solved it through our new inventions. And so I quoted these and I was like, okay, all of this is true.

Starting point is 00:51:02 But then I actually used the analogy of Superman, which is that if you're familiar with Superman comics and stuff, he always holds back because he doesn't want to hurt people around him. But every once in a while, like some villain comes like Darkside or Doomsday, he's got to just absolutely go all out. And he just like changes the rules. And I used that analogy. I said central banks can literally just completely, you know, both the combination of central banks and governments can completely change the rules. And so I said, you know, so far, this is my quote, 2019. So far, central bank tools have not been inflationary because they have primarily benefited

Starting point is 00:51:39 asset prices rather than middle class consumption. They printed money, but kept the money on the central bank balance sheets by buying bonds. If central bank actions get more aggressive combined with physical. fiscal policies and start targeting the middle class, they have the power to override these various deflationary forces with sheer monetary expansion. They can issue helicopter money to pay off debts, boost inflation, build infrastructure, bailout unfunded pension systems, and prop up the middle class if that's what policymakers decide to do. I wouldn't want to be holding a 20-year or 30-year bond at super low fixed rate yields in that kind of environment. Negative yields would be even more vulnerable.

Starting point is 00:52:16 sometimes Superman goes all out, and every few decades, central banks do unusual things. And that was 2019. And I mean, I didn't know that we'd have a pandemic the next year, but basically that step by step, that's exactly what they did. They just set out money to people monetized by the central bank, boosted middle class consumption, boosted inflation, boosted asset prices, and just completely overrode the various disinflationary forces we have. And so, yeah, I do think that they, you know, to the extent that they choose to, they can override demographic-driven disinflation, technology-driven disinflation, especially if it starts to challenge their fixed sovereign debt. And they start to actually run into kind of cute solvency issues. They can literally just print money. And if anything, that type of disinflation gives them more cover to do that because it's harder for it to manifest in real world inflation. I think another factor we might see going forward is, a bigger divergence being real world inflation and tech. So, for example, AI can make so many things way cheaper, right? The cost of doing art, the cost of doing a video, the cost of writing code, the cost of analyzing something, the cost of editing, the cost of just XYZ across the board.

Starting point is 00:53:31 So much things now are more productive, more disinflationary, cheaper to do. And a lot of that is in the information world, the white collar world. Whereas if you try to find someone in the U.S. to fix your H-FAC system or be a plumber or the cost right now are skyrocketing, the cost of people actually going out and doing stuff. And robotics are nowhere near the point where just like, you know, a car can just drive to your house automated and then a robot gets out and fixes your H-VAC system and drives away again. Maybe one day will be there, but we're not there this decade. even if we have self-driving cars around the margins, but imagine a robot that can just come fix your HVAC system, right?

Starting point is 00:54:12 We're not there yet. So these kind of physical blue-collar stuff is where I think some of the inflation is going to be more centered going forward. In addition, I think the energy side, you know, the tightness of the energy supply is still where inflation can come from later this decade. And so I think we can see a divergence where the cost of some things keeps just trending towards zero, right? It used to be that taking pictures was somewhat expensive now as basically free. That can continue eating into other things, you know, and like more things that are expensive

Starting point is 00:54:46 now trend towards zero cost, whereas real world stuff still has a substantial cost. And if, especially if money printing is used to override the deflationary forces from those other areas, it can jack up the prices of these more physical goods and services. And so that's where I think that the costs come when policymakers and central banks try to override the tech deflation and it manifests in the areas that are not being driven by tech deflation. It's so fascinating to speak to you about this, Lynn. And if we continue to be a bit more futuristic here, I'm talking about the declining influence of the U.S. dollar on the global scene.

Starting point is 00:55:29 I'm not talking tomorrow or next week or next month. I'm more talking very decades now, but who knows? Would it be realistic for the world to shift to a more multipolar currency world that is not picked to a neutral reserve currency, but where each region is built up around a dominant currency? Yeah, so a challenge is network effects. And one of the reasons why the dollar is so useful as a global reserve currency is because the capital markets are so deep.

Starting point is 00:55:59 So once you get dollars, there's so many things you can do with a dollar. You can buy treasuries. You can buy S&P 500 or any of the stocks they're in. There's an extensive private equity. There's a whole continent of dollar-dominated real estate you could buy. There's just tens and tens of trillions of dollars worth of highly liquid assets you can buy with it that are all in one big regulatory scheme, currency scheme, very liquid, and open capital markets.

Starting point is 00:56:27 the euro struggled more in that regard because even though you have a shared currency, you have different silos of capital markets. And so none of them are as liquid as U.S. capital markets, right? And so you're still siloed. In China, there's not a lot of foreign demand for Chinese equities or real estate. And so it's like if you have a, if you're running a surplus against China, let's say you're an oil producer, what do you do with that currency? It's like, well, there's lots of things you can do in the near term.

Starting point is 00:56:57 You can buy all the Chinese goods. You can go to Shanghai gold exchange and convert it to gold if you want. There's plenty of things you can do. But just merely holding their currency and kind of reinvesting into Chinese capital assets is not a very attractive thing to do with it. And when you get outside of those three major currencies, it drops significantly. So if Brazil is trying to make their currency or regional currency, how many entities, if they're running a surplus against Brazil, want to hold a lot of that currency and then reinvest it into Brazilian? capital markets, right? And so that's the challenge with this. I think that over the long term, I mean, you could have maybe like two major currencies that really compete. Like you could have,

Starting point is 00:57:36 say, the dollar system and the and the, and the Chinese wand system. You know, you could, you could potentially fracture that into into two, but it's really hard to have no neutral reserve asset at all. Usually, usually there's a network effect tendency that makes one dominant asset, kind of the underlying one. And that even as you have a more multipolar world, like even as you have payment arrangements that don't use that reserve asset, you know, you have China buy energy from Russia without using dollars, or China buy iron from Brazil without using dollars, or India buying arms from Russia without using dollars, right?

Starting point is 00:58:14 There's, I think we're going to see, and we already are seeing, but I think we're continuing to see de-dollarization of payment channels. We'll see more reserve accumulation, more reserve diversification. But there's still liquidity itself is a network effect. And so that's, and we're already seeing this manifest. For example, India and Russia are on good trading terms. They were for a while and they still are because, you know, India needs commodities. Russia makes commodities.

Starting point is 00:58:40 Russia also makes arms. And so, you know, they're, and they don't share a border. So they're not really enemies in the way or like, you know, adversaries in the way that some other entities are. So they've had a constructive trade relationship. The problem is when Russia runs a. surplus against India, they accumulate all these rupees and they think, well, what do I want to do with these rupees? There's only so much I want to reinvest into Indian capital

Starting point is 00:59:03 markets, right? And so they start saying, well, can you pay us in Chinese currency? You know, can you pay us in, they start to want to go up to stack to a higher network effect, higher liquidity currency at a certain point. And so that's the kind of self-reinforcing challenge of not having any reserve asset is that the top two network effects really kind of start to dominate, even as you can, it's not necessarily one set, but it's not a lot of assets, is my point. Only the most liquid deep capital market or most liquid markets can really maintain that kind of global monetary status. Yeah, and I think that's important to distinguish between, I were talking about what

Starting point is 00:59:46 fear currency dominance. We're talking about, do we measure it in payments? Do we look at the balance sheet of the central banks? Like, we'll come up with different pictures, depending on your methods here. But I want to sort of like in this segment of the episode to talk about different events around the world, perhaps start in Europe. The president of the European Central Bank, Christine Legat, she recently sat in the interview with the economist. And I'm going to quote here, if there's more trade in euros, we need to provide the liquidity supporting that trade. and international euro is a force for stability.

Starting point is 01:00:20 Now, I found that quote interesting, and not because you had a central banker who felt that her currency was really important, more people should use it. I think that's probably inherent in all central bankers to think that way. But I do think it's interesting whenever you are taking these snapshots and when you're looking at, say, the different balance sheets of central banks around the world and how that has changed over decades and how it looks to change now, you also see more gold being accumulated it now, for example. But I think I wanted to talk about Europe here, because to your earlier point, what is the role of the euro on the global scene? I mean, that's so far up an example of how

Starting point is 01:00:56 hard it is to establish a new network effect. So it was a very optimistic time 25 years ago when the euro was kind of coming into existence and, you know, kind of on the uprise. In recent years, you know, when we see some degree of reserve diversification, so we see a little bit, But China goes from almost no countries have reserves in it to maybe 5%, whatever. The dollar's been pretty flat. It's the euro that's been losing market share in the past few years. So, for example, China's kind of been taking market share from Europe, you could say. And there's been a few reasons for that.

Starting point is 01:01:30 One is that going back to my prior point, the fractured capital markets make it hard for any entity running a big surplus against Europe to want to know what to do with those euros. So prior to the euro, German debt markets were highly liquid. And after the euro, German debt markets are still highly liquid. And so that's the one everybody wants. When you get into other ones, they suddenly get less attractive. There's a long tail of debt markets that are just not interesting to foreign investors. And even the German debt market can't compete in scale with the U.S. debt market, the size and liquidity there. And so it doesn't fundamentally solve the problem of fractured capital markets. And the major.

Starting point is 01:02:10 setback with Russia has also harmed the euro because, you know, one of the key benefits to the euro is it allows Europe to buy energy in their own currency. And for a while, that was working. And it still is. But for a while, for example, if you looked at Russian natural gas and other commodities going to Europe, it was increasingly euro denominated. Over time, as that build up for years and years and years, the dollar denominated trade was diminishing and the euro which in a nominate trade was increasing. But now with the war and then with the busted pipeline and with the, you know, that whole trend is derailed.

Starting point is 01:02:48 And so you're kind of starting from square one again. And it's, you know, it's one of those, it's big enough currency where it's a serious contender to build a buy energy in its own currency. So it's helping with that problem. But it's just, it's not, none of the network effects are making ground. And then now that Europe doesn't really have. the energy security that it used to. We've seen, for example, German deindustrialization. So Germany's kind of been the economic powerhouse of Europe. And if you look at, you know,

Starting point is 01:03:18 if you're in any sort of energy intensive industry, if you make chemicals, if you manufacture stuff, a lot of that's been leaving Germany and going to places like China because the energy costs are just not really competitive anymore and just future risks of energy shortages or what energy costs might be five, ten years from now if you're building a very long-lived facility where you want kind of cheaper energy. And so overall, I think that we're seeing a diminishment of the euro on the global scale. It's not really, if there's network effects and you're like in third place, it's just not a great position to be in is kind of what we're seeing, as well as just internal policy issues that might kind of hamper that or just bad luck

Starting point is 01:04:01 with things like, you know, their biggest natural gas provider going to war in Ukraine. Like there's both external things that happened to them, internal energy policies, I would argue that they've taken missteps on, and then just the sheer challenge of trying to compete with leading network effects in money. It's just hard. So I'm not very optimistic on the euro's prospects for globalizing itself more than, say, the high water market that it's already reached. Let's continue on a trip here and go to China.

Starting point is 01:04:33 So you have renowned economist Richard Koo. He recently claimed that China is in a balance sheet recession. And he also claims that the solution is simple. Because if households will not borrow and lend at low rates, then the government must. At least that's what he's saying. So fiscal deficits must upset the financial surpluses of the private sector until the balance sheet are fully repaired. Now, perhaps we should take one step back before we discuss this and define what is the balance sheet recession. And I'm also curious to hear whether or not you agree with Koo's assessment.

Starting point is 01:05:09 Yeah, so a balancing recession, basically it's kind of running the Japan model. And a lot of that actually does have to do with our prior discussion around debt restructuring. Whenever you see a multi, like a very long trend of de-leveraging of the private sector and a leveraging of the sovereign sector, you're kind of going through that type of model, right? So I do think that on some sense, China is going to go through what Japan did in a sense that China's known for their very high housing leverage. That's been a big issue for them in recent years as it's kind of deflated that bubble to some extent. They've historically not had much sovereign debt, but now they are inching up over time

Starting point is 01:05:48 in terms of their sovereign debt levels. And so we are, I think, going to see a gradual transfer from private sector debt, household debt, corporate debt, regional government debt, like province debt, up to more of the sovereign level. And so far, China is currently running kind of the opposite playbook of the U.S. is currently running very loose fiscal policy. I see very, very huge deficits and they're pretty tight monetary policy to try to offset that. Whereas China is currently running pretty tight fiscal policy, you know, they don't really have very large deficits. They've been very reticent. you know, they've not been aggressively trying to do this transfer up to the sovereign level.

Starting point is 01:06:25 They've been very hesitant to do that. That's why I think it's going to be a very gradual process. And because of how centralized China is and because of the culture itself, they generally have a higher tolerance for economic pain, I would argue, than, say, the West. And whether that's a good thing or bad thing is, I'll let the listener decide, but basically, they can go through longer periods of de-leveraging and stagnation. It seems like than many other countries. We're also seeing a big divergence there between the export sector and the consumption sector.

Starting point is 01:06:57 So their export sector is still firing on all cylinders. I mean, it's just been a straight lineup in terms of exports. And specifically, they're also moving up the value stack. And so just in the last three and a half years, they've had like a hockey stick like growth in their full auto exports. And we don't really see, I don't know about Europe, but we don't only see it in the United States. No one drives Chinese cars.

Starting point is 01:07:20 But if you go to Egypt, for example, this big, big percentage of Chinese cars in the road, basically all of the emerging markets are their primary target. So China is now the biggest auto exporter in the world. They've actually surpassed Japan. And this all happened in three years. They also just now they have their own aircraft producer, commercial aircraft producer. So the Comac is now up there, you know, potentially with Brazil's Embraer and probably has the opportunity to surpass that and kind of rival Airbus and Boeing as, you know, kind of a leading commercial aircraft

Starting point is 01:07:55 producer. That's been a long time in the making, and it's still early stage for that. They're further behind that adoption curve than their cars, which really kind of taken off in recent years. But where I'm going with this is that their export sector is still just absolutely on fire as the kind of the manufacturing hub of the world. And where they are going through something like a balance sheet recession is their domestic consumption economy. So their household deleveraging, their internal use of commodities, their internal construction, their internal kind of retail sales and things like that. All of that is pretty stagnant at the current time because China's leadership is trying to de-leverage it and without the fiscal looseness that we've seen in the West.

Starting point is 01:08:42 And I think that this is, it has global implications because it affects China's internal commodity consumption. It affects, you know, the success of Chinese equities, for example. And I think that this is a transition that they are going through for probably quite a while. We could see some nonlinear moves in the future. Right now, they're sticking pretty to, you know, if you look at their money supply growth, it's pretty consistent. If you look at their physical deficits, they're pretty low. We are seeing a very gradual shift from private sector debt.

Starting point is 01:09:12 that's mildly de-leverging as the sovereign mildly levers up. We are seeing that shift. Now, if you do get a change in the public's perception of it, you could have a more stepwise change in terms of larger fiscal impulse. A good kind of example of this is that they did their multi-year zero COVID policy, kind of some of the tightest lockdowns in the world, even beyond some of the initial points. So, for example, in like 2022, they were still heavily locking down and eventually started to get protests there that were some of the biggest protests in decades. It was not just one city. It was like protests are breaking out in multiple cities.

Starting point is 01:09:49 It was increasing dissatisfaction with how their leadership was handling this. And so you saw a pretty quick pivot at one point where they finally just said, okay, we're ripping the band-aid off. We're going to change our policy. And that was one of those things where it was tied to some extent to national identity. One of their kind of arguments was, look, our system is better than the West because, look, we can handle a pandemic better than they can. But increasingly, that was not the case. It's not the case. And so they ran that policy for longer than most other countries, but even then they couldn't do it indefinitely. And the people just kind of revolted and they had a change course. Kind of social harmony, if it starts to get out of hand, it could force a pivot. And you could eventually see that in the deleveraging, right? If the economy's that needs for too long or they do encounter too deep a recession. You can go back to my prior

Starting point is 01:10:42 point, like my 2019 piece about bond bubble and printing, like you could have an absolute, just massive kind of stimulus outside of China, I mean, coming out of China at any point where they feel that it's a risk not to do that. If the public is just kind of increasingly frustrated with the economic prospects, you could see that type of pivot. But until we do, the base case, I think is just more gradual shift from China's sovereign level is probably going to keep levering up. And their private sector is probably going to be stagnant for a while. Their domestic private sector and then their exports, I expect, they continue to be very strong. Let's continue on this trip around the world and go to Argentina.

Starting point is 01:11:25 And now I think that from a currency perspective, at least if you're a nerd like me, this is perhaps the most interesting country right now. The latest number I found was 113% inflation rate. I think that's also heavily debated what it truly is, and I think it probably depends on who you're asking. And at the time of recording, we don't know who will be the next president of Argentina. We probably will know whenever this episode goes out. But I want to talk a bit about one of the candidates, there's a runoff now, Javierat

Starting point is 01:11:52 Media. My Spanish is terrible. So I do apologize. I probably butcher that name. But you can say a lot of things about him, but boring is probably not. the word you want to use. Among his many proposals, one headline that called the financial media attention has been to dollarize the Argentina economy. And the proposal is of course controversial, but it's probably not as far-fetched as it might appear from the outside.

Starting point is 01:12:22 Many Argentina's already used dollars today, and dollarization of your economy has a precedent. And one example could be Ecuador that dollarized back in 2000, and at least in the short term, that rained in inflation. So I guess my question to you, Lynn, is not whether or not Argentina should dollarize its economy, but rather what would be the implications if they decided to do that? And what would the implication be if they decide not to? So, yeah, it's a good question. And when you have an untenable situation, eventually you do get more polarizing figures come up.

Starting point is 01:12:57 people kind of hit their breaking point and start to say, you know what, I want to kind of throw a hand grenade into the situation and mix things up. I'd argue that the Brexit vote was a similar direction. The election of Trump was a similar direction. We kind of eventually just like, you know what, I'm going to throw the dice on this kind of outcome because clearly the current, just incremental trend is just not working. And so that's kind of, I think, what we're seeing manifest in Argentina. And again, I don't know what the election outcome is going to be. But, you know, in general, when a country, when a country's own ledger becomes so destabilized, it kind of gets for basically, it becomes increasingly untenable for that country to offer a currency. You know, people, the inflation's so high, it becomes so unusable that the people themselves

Starting point is 01:13:44 just increasingly refuse to hold the currency and they hold other currencies. And so that currency either hyperinflates or nearly so. And they can persist in that period for a long period of time, but they're kind of fooling themselves. And so one of the things that they can do is say, okay, we're just going to use, you know, the dollar as our currency. And so it's basically an admission that they're just not capable at the current time, the current political infrastructure running their own currency. And that when you're, when you have constant double digit inflation or in our teenest case, triple digit inflation, it's very hard to run an economy because,

Starting point is 01:14:21 currency is an accounting system. It's impossible to make long-term contracts, business to business to consumer, or there's so much overhead that extra administrative overhead you have to do with constantly renegotiating prices and constantly having shorter-term contracts that have to get just updated on a regular basis. And it becomes so untenable. And eventually those costs outweigh the government's own desire to have their own currency. And so eventually they say, you know what, We were just basically forced to dollarize. And so there has been a decent track record of countries that dollarize. You know, right now, Salvador, for example, they've been dollarized for a while.

Starting point is 01:15:01 You know, they're doing pretty well in Latin America. A number of countries that once they kind of rip the bandit off and try to have a firmer, you know, they kind of let go control the money system that they're able to stabilize and start building a base from there because people are actually able to make economic calculations again. Now, what would make this one kind of unique is the sense that, you know, it'd be, I think, the biggest country to do it. You know, usually dollarization happens to lower population countries.

Starting point is 01:15:27 Just, you know, the fact that Argentina's size and even their former wealth, it basically would be pretty remarkable for a country like Argentina to dollarize. And it's one of those things where if too many countries do it, you actually get a really big imbalance. It becomes like, you know, if too many countries are using the dollar as their currency, that actually starts causing major balances in the global system. So it's not really an answer for every country, but it's an answer for a lot of countries potentially in the intermediate term.

Starting point is 01:15:56 And this goes back to my prior point of basically all the gates are down now. So with things like stable coins anyway, you can just completely go around the former control. So Argentina used to be able to keep out dollars or minimize the inflow of dollars, whereas over time technology makes it hard and harder. their financial borders are more and more porous to dollars to Bitcoin to whatever currency, whatever market currency is winning, they're far more porous to it. And so I think we're actually

Starting point is 01:16:26 probably going to see an acceleration of this type of thing where the long tail of the weakest currencies, it's going to be increasingly hard for them to maintain a currency because the options that people have are so much better. And I think the big downside risk is it can cause major changes in policy. And so, for example, Argentina has a lot of fiscal support for the poor that's just done with printed money. And the challenge is that it harms the poor at the same time as it helps the poor, right? It's saying, okay, you're constantly getting diluted. It's impossible for you to save, especially because the poor have trouble accessing dollars and investments and credit and things like that. So they're actually suffering the most from inflation, but they're also

Starting point is 01:17:11 getting a constant stream of new money to go out and buy their groceries with and things like that. And if that gets kind of shut off, especially abruptly, you could get protests, you could get breakdowns of social cohesion. So these are not often pleasant transitions, even if they might, you know, it's kind of like how if you rip a bandit off, it hurts. If you put medicine on a wound, it hurts. But it's important for like long-term healing of the problem. And I think that that's, That's the way to think about this. And so it's just kind of remarkable to see a country like Argentina going through it. And I think that's partially testament to these technologies that just make it hard and harder

Starting point is 01:17:50 for borderline currencies to be able to sustain themselves. And I think on that note, Lynn, it's important whenever you discuss something like shoot your dollar rise and not to say yes or no, but say this is what happens if you do X and this is what happens whenever you see. and sort of like depends on what you want the outcome to be. It's very complex, and I can't help myself, but say one decision that is not complex is the decision to buy your wonderful book, Broken Money.

Starting point is 01:18:18 But before we end the interview, Lynn, I wanted to hear how is the public received broken money. I'm fairly certain I'm not the only one who is a big fan of the book. So far, it's been very positive. You know, the ratings on Amazon and Goodreads are both better than I expected. I like the diverse kind of people from multiple different countries are bought. it's like it's cool to see all the different markets that it sells to. All the translation requests are we're currently working to get it translated into other languages for people, which is always

Starting point is 01:18:46 kind of rewarding to see. And then there's like the academic interest in the book. And so, for example, you know, there's some professors that are planning on using it as part of their class on money or inviting me to give guest lectures about the book or to give talks about the book at universities. And so it's a very rewarding experience. And, you know, And I've said this from the beginning that nobody should really write a book for the money side because it's not generally a very economical thing to do with your time, especially if you work in investments or you work in other kind of profitable industries. A book is generally not the best hourly rate of your time at all.

Starting point is 01:19:24 Instead, if you have a set of ideas that you're, it's like distracting if you not to write the book, like you have a calling to write the book. If it'd be harder if you not to write the book, then to write the book is when you should write the book. And because I did it like that, it kind of came out of the heart. And the intangible benefits of having a book out there are very constructive. And so it's, so far, it's just, it's been very humbling to see the responses to it. And I've just been very happy that it's out there and that people are able to enjoy it as much as they do. You know, I can most certainly say, and I've probably said it 10 times I read, but I've got to say yet another

Starting point is 01:20:01 time, this is a wonderful, wonderful book. And I encourage everyone tuning in to grab the book. whenever they can, gift it to friends and family as well, which I have too. But you also have a wonderful blog. I just wanted to give you the opportunity to give a handoff to that, Lynn. Yeah, so Lynn Alden.com. I have public articles, public newsletters, and low-cost research for people, including macro equities, digital assets, you know, kind of covering a pretty broad thing. So people can check that out if they want my ongoing thoughts. Wonderful. Wonderful. Thank you so much for taking the time to speak with me again here on the show, Lynn. It's always a pleasure, Channing.

Starting point is 01:20:36 Thank you for having me again. I 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 podcast network.

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We Study Billionaires - The Investor’s Podcast Network - TIP591: Currencies and Debt w/ Lyn Alden

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