MI Rewind: Why Warren Buffett Might Be Wrong w/ Matthew Piepenburg

24:24And for a limited time, you can use code stocks15 for a 15 % discount at checkout. All right, back to the show. So how do we explain this simply to somebody who's new to the market or looking to invest? As millennials, we have people that want to start investing. And I tend to agree with a lot of what you're saying. And the markets are ripping, right? They're going up. We see Bitcoin ripping. I mean, everything is doing so well this year, despite everything that you're talking about. Yet, I still tend to agree with what you're saying, but you have somebody new come into the market. And how do you warn them of these dangers while things continue to rip on?

25:07I think that's a great point. I think Bitcoin's a little different than, say, the stock and bond market or stock picking. Bitcoin, as we talked about, I think before, is a middle finger to the central banks, knowingly or unknowingly. Those who buy Bitcoin are saying, look, I don't have faith in the US dollar or the euro or the yen or the yuan or the peso. I don't believe in paper currencies or fiat money anywhere in the world anymore because we can keep creating them out of thin air. We can keep creating them through quantitative easing. It's not a store of value. So Bitcoin investors like gold investors.

25:38Bitcoin is more of a millennial way of approaching the same problem. Gold is a more old school way of approaching the same problem. Bitcoin is just saying, I don't trust the central banks. I don't trust monetary policy. And frankly, I probably don't even trust my government or the dollar that I spend. So Bitcoin, knowingly or unknowingly as a way to play that risk. When you're talking about risk assets like stocks and bonds and millennials looking at the tech sector, and I've seen that movie before with tech stocks, certainly I was euphoric about tech stocks for a few years in the late 90s and did quite well by accident on those.

26:11But I think it's what I tell my own daughter, who's second year now at Goldman Sachs and not drinking the Goldman Kool-Aid, but I say to her the same thing I say to any millennial, this is a great opportunity to watch a market peak, needle peak, as they always do before they nosedive. And again, I'm not saying they're going to nosedive next week or next month or even next year, because there's so much support for these markets. You don't want to fight the Fed, but you can't trust it. But if you're a stock picker, you darn well need to know when you're entering and when you're exiting. We've talked about this.

26:43If you're truly a sophisticated stock picker, whether you're a value investor or a growth investor, if you're a value investor, you're looking at the balance sheets and you're hopefully buying low and selling high. Right now, it's very hard to buy low as a value investor because there's no real value in these markets. Everything is so overvalued. But even if you're a growth investor, you have to be looking at your DMARC indicators, your Bollinger Bands, your resistance lines, your support lines. If you're sophisticated enough to do that, fine, you can play the volatility. But most people aren't.

27:11Most people with 401ks aren't. Most retirees aren't that sophisticated or don't have the time. but it's really not the time to be chasing tops, even if these tops can continue to last longer than they are right now. And there's every good reason to suggest that they could. Central banks are powerful and you don't want to fight them. But at the same time, you don't want to let them take you over a cliff at some point. You have to manage risk. And I think for millennials, the rule number one, in my opinion, for making money on Wall Street, which I didn't follow my first time, I just got lucky. But rule number one is you make money by not losing money.

27:47And secondly, you buy at bottoms and you don't buy at tops and you sell at tops. Right now is a clear top and people are still buying. There's still that fear of missing out. They're still chasing like the Japanese do right before the Nikkei crashed in 89, just chasing these tops. And truthfully, you can't blame them. They've been reared in a market that for the last 12 years, every dip has been a buy, literally every time. And every time there's a 10, 20, or even 30 % correction, if you can kind of pick a technical or fundamental entry point, you're going to make money on the dip because the central bank's going to create an environment where markets are going to rebound.

28:21Problem is, as we've discussed, at one point, those dips aren't going to bounce back. And you can't always know. And my opinion is you don't want to be all in at a market top, even if it's not the top, because I think markets can go much higher than this, but they're also going to go far, far lower just on basic principles of mean reversion. So that's one way of looking at that. Yeah. We briefly talked about Carnival Cruise Lines last time and people, when it fell, I think it fell 80 % roughly. And that garnered a lot of interest by millennials. And a lot of people were asking me, should I dump all my money in Carnival Cruise Lines?

28:53I don't personally invest like that. So I said, listen, guys, I don't invest like that. So I'm not recommending anything. You can make this decision for yourself. But for me, I don't invest like that. So I personally wouldn't do that. But like you said, the dip kind of came back. And if you did buy at the lows, you did very, very well. And this time it came back, but next time it might not. And I don't personally know when that time is going to be. So it's hard for me because a lot of people ask me, should I get in the market? And another example is Tesla. People have been asking me for a long time, should I invest in Tesla?

29:23I don't invest in companies like that. And I don't necessarily think that's going to continue on. But it's hard to give this explanation to people that are new to the markets when you also believe in what you're saying. Right. Because then you have to ask yourself, the answer to all those questions from Carnival to Tesla to value to growth is sadly because, and it's no fault of their own, because we've been reared in a market in the last 15 years, last 12 years, where there is a sense of this big fat fed airbag underneath everything. And there's so much support for easy debt that companies can live on debt, grow on debt, have terrible balance sheets, continue to rip, or have no balance sheets, but they hit a new bottom.

29:58So you buy at that bottom because the markets will recover. Natural market forces have been so distorted that people don't know how to measure markets anymore using traditional measurements of risk, using traditional measurements of volatility. Now it's headline-driven or Fed-driven. So it's very hard to really understand how to look at a balance sheet or look at a trend line and use the old tools that before the Fed came in and distorted markets. So clearly, as they have now, that you could make reasonable assessments of risk. Now, risk is pretty much taken off the table at the day-to-day level.

30:32Instead, we've replaced that with a much larger risk, a much greater risk of when this unsustainable debt levels, when this unsustainable support falls on its own face. And that's very, very hard to time. In fact, it's almost impossible to time. Now, we've gotten so far from the fundamentals that you simply can't know how long it can last. We've never seen this kind of intervention or quote-unquote accommodation or stimulus or support by a central bank at this level in the US before. So it's thrown all the old measurements and old kind of adages out the window. In that regard, a lot has changed in one way, but nothing's really changed.

31:09Eventually, anything that's overvalued blows apart. Eventually, that will end horribly and we'll see a massive correction in the markets, even with the Fed support. But until that time, it's incredibly hard to time that. And so you take your risk. I would just say, as I say to my daughter, wait for the bottom. If you're going to be in the markets at all, put money in that you can afford to lose, be very realistic about it, and be patient. When you're young, you can wait for that bottom. It's a macabre way of looking at things because you're basically going through Barron Rothschild's opinion of wait until there's blood in the streets to buy.

31:40You may have to wait a long time for that, but there will be a point where markets will correct severely, and you can buy Berkshire Hathaway or whatever you want at 60 cents on the dollar, 50 cents on the dollar at a discount. That's when you go long and you can make a smart buy. Anything you're doing right now is effectively gambling and trend following at this point, in my opinion, in the markets. They're just not natural markets anymore. And to buy and hold now will work. A 60-40 portfolio will work as long as markets trend up on the tailwind of Fed support. And there's a lot of reason that Fed support won't last forever.

32:14and you can get caught on the wrong end of that, when that tailwind becomes a headwind, markets can fall very precipitously and the central banks won't be able to save you at that point. And then you take a 60, 70 % loss in your portfolio. Robert Leonard Leonard After we last talked and as I prepared for our conversation today, I read through your Signal Matters report called What Lies Ahead, How to Navigate Extreme Markets and Extreme Monetary Policy. This is a fantastic 25-page report with a ton of great information. But the first line in the introduction caught my attention is one that I want to talk about.

32:47It says, the key to any great portfolio is not only the investments it holds, but also the macro environment surrounding. Now, I'm not necessarily saying I disagree or that I'm right by any means, but I have tended to not focus on the macro environment much in my investing. Maybe that's because I've primarily only been an investor during one of the greatest bull runs in US history, or maybe it's because of Warren Buffett. I've studied him a lot and he talks about how he's a bottom-up investor and doesn't pay attention to macro or things like interest rates. So my question is this, why might Warren Buffett be wrong?

33:22Why do millennial investors listening to the show need to be aware of the macro environment when making investment decisions? You make a lot of good points. First of all, Buffett is a legend. He's a great value investor. And I believe in his key rule, the two rules, what is it? The first rule is be patient. And the second rule is don't forget the first rule. He is a legendary value investor for a reason. And I don't think you can discount someone like Warren Buffett, although I say in a few ways, I strongly, strongly disagree with Warren Buffett. And that may be a blasphemy in my position. But I think first of all, and it's kind of like a Malcolm Gladwell book where he talks about sometimes the luck of the generation you're born into or the fates of the generation you're born into.

34:06In a lot of ways, Berkshire Hathaway is a classic example of perfect timing, not to discount anything that Warren Buffett did because he understands financial statements, he understands free cash flow, he understands balance sheets, and he invested brilliantly early in the markets. And Berkshire Hathaway's portfolio is done extremely well. But when you break it down, Berkshire Hathaway today is really not much more than an index. It's an S &P index. It's going to rise ridiculously well in bull markets. And it has been a bull market effectively for many, many decades and certainly the last 12 years.

34:39So I think Berkshire and Buffett are being greatly rewarded. What the problem is, is I don't think Mr. Buffett really understands, well, I think he understands. I don't think he wants to accept that it is a new normal when you have this much central bank distortion. So that buy and hold value investing portfolio that he has will do great as long as markets trend positively with support. But because the central bank has so distorted markets and created so much risk, Berkshire Hathaway is going to get hammered just as heavily, in my opinion, as the S &P. And I think for Warren Buffett not to be looking at the distortions in the markets today and to think that macros don't matter is incredibly naive, even for Warren Buffett.

35:23And I'd love to have a one-on-one with him on this. You know, macros are boring. And macros, by the way, can be horrible while markets are still ripping up into the north for years. So it's easy to ignore macros because, hey, the markets are up. The Dow just hit 30 ,000. But as the Dow hit 30 ,000 yesterday, keep in mind that global debt is at 277 trillion. Global GDP is at 88 trillion. We have a three to one global debt to income ratio. That's a macro point. It may just seem like a number. It may just be a boring ratio, but it's a disgraceful number in the history of capital markets going all the way back to Persia and Rome to the 1700s, France to today.

36:04That's a staggering disconnect between income and debt. That kind of debt is appalling. US combined corporate, public, and household debt has just crossed 80 trillion. It's a simply unsustainable, staggering, disgraceful number. That's another boring macro indicator. But trillions matter when you're talking about that kind of debt. Globally, the value of the global equity markets are higher than global GDP. Those are dangerous, dangerous macro indicators. And yet, markets can continue to go up. And so if markets are going up, the Dow hit 30 ,000 and the S &P is breaking new highs, even though the world's on its knees economically, it's easy to ignore those boring macros.

36:46And I understand that temptation. It's very seductive. It's always what happens, though, before a bubble ends. The market's needle peak up, crowds get in, they're sustained by groupthink, they're supported psychologically by seeing positive headlines every day on the markets. And so they forget about these landmines all around them because they're boring and kind of complex. But debt is what destroys markets. It's what destroys empires. And that can be years before you see the real tremors of that. In the meantime, you enjoy the ride. But it's kind of like Titanic. Look, today when people are talking about what they're investing in, Tesla, Carnival Cruises, arbitrage, growth, value, they can have all these interesting, fascinating conversations that can be really kind of compelling.

37:27It's a great thing to do. It's like being on the A-deck of the Titanic and saying, am I going to have lamb? Or am I going to have duck? Am I going to have this dessert? That's a great conversation at dinner. But what you really should be looking at is the iceberg just off that bow. But if you're not looking at that iceberg, you're not thinking about it, it's easy to get interested in the menu choices, like the securities choices. you're making. And that can go on for years of just enjoying the menu and ignoring the iceberg. But the iceberg is boring and it's not talked about a lot in the media.

37:54But when you have 277 trillion in global debt or 80 trillion of US corporate household and government debt, that is a ticking time bomb. And the only thing keeping that time bomb from exploding is the central bank keeping the cost of that debt artificially low by printing trillions of dollars to buy unwanted securities, buy unwanted bonds. If you buy a lot of bonds, you keep interest rates and yields down. And that game of just low debt seems to actually work ad infinitum for infinity because the Fed just prints, keeps bond prices up, yields and rates are down, they set rates low. The cost of debt is low.

38:32If the cost of debt is low, companies are going to borrow to rollover debt to stay alive. There's zombie companies. There's$1.4 trillion right now in zombie company debt. Those are companies that have no earnings, no profits, can only survive by taking out a loan tomorrow to pay for yesterday's obligations, taking another loan next week to pay for today's obligations. That is not a sustainable policy. It always ends eventually, but you can't time when it does. And if the Fed wants to keep forcing interest rates low and printing money to buy U.S. Treasury bonds, they can play that game for a long time.

39:04But it's a Frankenstein market. it's a macro dead market. But in the meantime, the stock markets are ripping. The conditions are great for the stock market until that central bank policy fails and when interest rates rise, and we could talk about how they will, and I think they will eventually. But until that time, it's easy to forget these things. But to go to your question, macros do matter, but macros can be screaming warning signs for years before anyone listens. And in the meantime, markets are ripping. And macros, they're confusing and they're boring and they're kind of nonsensical. And when you're just looking at stock prices and profits, you forget that very easily.

39:41Robert Leonard Some people that listen to the show are individual stock pickers, but there are also a lot who are just getting started and prefer to invest in index funds. Does the macro environment only matter for individual stock pickers or does it matter for ETF investors and those investing solely through their 401ks too? Robert Leonard Yeah, I think it matters for both. I think for stock pickers, if they're sophisticated stock pickers, like it goes back to my original point, they're looking at technical signals or they're looking at fundamental signals. And so if they're sophisticated stock pickers, they may not be looking at that iceberg, but they're certainly looking at their individual securities and knowing when to take profits and when to get out.

40:17And that's an art and a science. For ETF investors, macros really matter and broad topics like ETFs themselves as instruments matter. I think it's very important for 401k investors, whether they're millennials or retirees, it's very important to understand the embedded risk in ETFs. Stock pickers can assume risk and they have a profile to manage risk that's a little bit different than more 401k type investors of any age. 401k investors just do what their advisors tell them, which means a 60-40 portfolio of bond and stock ETFs of different sizes, growth, value, corporate junk, all that. Those are highly correlated dangerous portfolios, which we can talk about.

40:58But ETFs themselves are incredibly dangerous for a lot of reasons. In fact, Michael Burry, who was famous for his hedge fund in the big short, I think he's described ETFs as probably the biggest risk in the markets. That's a macro kind of conversation. Why are ETFs a big risk? At a macro level, they're a big risk because there's so much support from the central banks for these markets that ETFs are rising. And also, So pension funds and sovereign wealth funds and 401k advisors and managers have no choice but to buy ETFs. If you've got trillions of dollars or billions of dollars at the Ohio Fire and Police Pension Fund or the Chicago Teachers Fund, they're going to buy index ETFs because that's the easiest way to track the market, or they'll buy a tech sector ETF to get tech exposure.

41:45But those ETFs are just a bag of marbles. Some of those marbles are good. Many of them are broken, but you buy the whole bag when a sovereign wealth fund makes an allocation, it pushes the price of that whole bag of marbles up. That means even the bad marbles in that bag of marbles go up in price, just like ETFs would have a lot of different stocks piled into them. If a big fund buys that index as part of a pension fund or sovereign wealth fund or retirement fund or 401k, all those stocks are going to go up together in price and ETFs become massively, massively overbought and overvalued. And again, those are wonderful looking at your 401k statements while things are going well, while the market is riding up.

42:24And you have to say, though, when things go bad, those same ETFs are going to sell off much, much faster than they rose. They rise very slowly, and then they sell very precipitously and terrifyingly, like we saw in 2008 or 2003. And that's the danger. And so, to your point, macros matter for those passive 401k ETF buyers just as much as they do for stock pickers, in fact, more so because if the macros are telling you there's an iceberg somewhere off the bow, it doesn't matter if that iceberg hits tonight at midnight or four weeks from now or a year from now or even four years from now. If there's that kind of risk, you can't just assume that when you hit that iceberg, you have a lifeboat because if the macro risks are pushing ETFs to valuations that are beyond comparison in history, in my opinion, then when you have that dark night of the soul in the markets, those ETFs are going to sell off.

43:15That means your portfolio, your 401k, your retirement account is going to get blistered. And unlike 2008 or 2009, we won't be able to print another 10 trillion or 7 trillion or 28 trillion globally to bail you out. So you have to be thinking about that macro risk. So I do think macros still matter, even though right now they're largely ignored. It's very easy, tempting, and frankly comforting to ignore the macros right now because the headlines are all in your favor if you're a bull. I've heard that if we go back to 2000, the tech bubble, banks bailed out those companies. Then you go to 2007, 2008, 2009, the government or the Fed bailed out the banks.

43:57Now, the question is who's going to bail out the Fed or the central bank? What do you think about that? Yeah, it's an interesting kind of development. All of those cases of bailouts are all the same symptom. You've got a debt binge, a credit market crisis, a liquidity crisis, and then a bailout. And the bailout is always creating money out of thin air, creating more debt to solve an existing debt problem. And you're saying, well, who bails out the Fed? Is the buck stopped with the Fed? And in a sense, if the Fed has a money printer in a basement, it can print theoretically forever and bail itself out.

44:31What's happening, and again, this isn't making the headlines, It's a macro conversation. It's a boring thing. But what's happening at the IMF and at the World Bank, the IMF just came out with a very, very disordered new video on their website called the New Bretton Woods. But it's not just a video full of euphemisms and horribly bad math and lots of misstatements and untruths. But if you dig under the hood of that, what the IMF is saying, we have a massive debt crisis. They're finally admitting that. We have a debt crisis. And they're blaming it all on COVID, even though the debt crisis was there long before COVID.

45:03But what the IMF is suggesting is a new reset. They're calling it a new Bretton Woods, like we had in 1944 after World War II, as if COVID were comparable to the millions and millions of deaths and economic destructions of the Second World War, which I think is an insult to history to compare the two. But even if you believe COVID is as bad as World War II, which mathematically it isn't, but the IMF is using this. They're basically telegraphing and staging how they're going to bail out the central banks. And the IMF's plan is to create basically a new kind of currency and a new global currency, just like Bretton Woods, the dollar became the global currency.

45:41The dollar was then backed by gold, so it had some credibility. Nixon welched on that in 71. But the IMF is basically saying, there's so much debt, here's the solution. We're going to create more debt and we're going to pay for it with a new global currency. They're going to take away the special drawing rights that are existing now and create this new cryptocurrency, government central bank currency. So it's the absolute definition of insanity using the same solution that's not solving the problem and thinking you're going to get a different result. In other words, the same policy, it's just a little sexier.

46:12It's going to be a new currency, a new crypto, and that could be five years or five months from now. It'll be like a plaza, a quarter, Bretton Woods moment where they're going to blame this debt crisis on COVID. And gosh, we have no choice now. We're going to get together in the free world and we're going to have to figure out a way to reset our debt, create more debt solutions to a massively unsustainable debt problem. And to pay for that rather than print dollars or euros or yen or won, we're going to come up with this new central bank currency. And that's just putting lipstick on a pig. It's a bunch of really fancy IMF overpaid bureaucrats coming up with a new idea that's nothing new at all.

46:48It's appalling. But be ready for that. Again, that's a boring macro thing. It's not making the headlines. It's hard to really get your hands around if you're not an economist or someone looks at the markets, but it's really nothing new. It's nothing new at all. It's just more debt and more printed artificial currency. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle.

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47:56Seriously, go ahead. I promise you'll like what you find. Bonus points if you show your support for our work by clicking follow. If something piques your interest, just start listening. No hard feelings. I'll be waiting for you back here. Just like everybody else, there was a time when I was a beginner investor. And I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on. But it's never too late to get smarter about stock investing from the ground up. At The Investor's Podcast Network, we've made a habit of studying the world's best investors, and now I'm distilling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with.

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50:38Of course, global pandemic is not great for anybody from a health perspective, but from a fiscal policy, monetary policy perspective, it almost became a scapegoat for the central bank because up until then it had no reason, it knew it needed to do all of these things that you're mentioning, but it didn't have a reason to publicly back why they were going to do those things. Now with COVID, it can say, hey, this is why we're doing it. So that's a really interesting dynamic as well. Yeah. I wrote a piece months ago about how COVID saved the financial markets. And again, this goes back to my point earlier that there was nothing normal pre-COVID.

51:11That's how you could see a recession coming. And believe me, we are in a recession. I mean, so many data points to confirm that. But even pre-COVID, there were so many signs that we were in a recession or heading into recession. And more importantly, that our market was so overheated, something bad was going to happen. Bond markets were overbought, stock markets were overbought. How was the Fed going to bail that out? How are they going to come up with another TARP or 2009, 2008 bailout? That would not go well, I think, for most average Americans who are sick of seeing so much money go to bail out Wall Street or banks when they're suffering at their Walmart purchases.

51:47That disconnect, the wealth disparity in America is so great now. It's the greatest in its history, which is a crime. It's a proof of the failure of our central bank system. By the way, if you just look at the fact that the Dow's at 30 ,000 and that unemployment's where it's at today, and that 40 million Americans are out of work since COVID, or that 3.3 million businesses have shut down or that 40 % of black-owned businesses have now shut down completely. How can you have that main street reality and a stock market hitting new highs? That's proof that you have some kind of distortion. Whether you agree with me or not, you can't deny the obvious disconnect.

52:19But what happened with COVID is, it's like Winston Churchill said, never let a good crisis go to waste. COVID created a humanitarian, legitimate humanitarian backdrop to slide in a ton of liquidity back into the Wall Street, into the repo markets, into the treasury markets, into these liquidity machines that keep Wall Street going. And if you actually look under the hood of the math, where all that fiscal and monetary support went, the majority of it went back into Wall Street and the markets and the banks, not to Main Street, despite the laudable efforts of the care packages and the PPP loans and all those things.

52:53What really happened, and again, it doesn't make the headlines, is you saw another TARP package writ much larger. There was much more support for Wall Street, the bond and equity markets during COVID than there was during the 2008 financial crisis, adjusted for inflation. So behind the scenes of this horrendous global crisis, Wall Street got the bailout it would never have been able to justify but for COVID. And I'm not alone in that opinion. I'm not saying that the Fed created COVID, that's something like that. I'm saying, but because of COVID, they got a golden opportunity to bail themselves out yet again, because look at the trillions of dollars that have gone into the credit markets and the repo markets and hence indirectly into the stock markets.

53:34And that explains again why you can see an economy on its knees by every metric and a market reaching all-time highs. It really is the disgraceful disconnect between Wall Street and Main Street right now. And that never bodes well historically for any society. Robert Leonard I didn't necessarily plan on talking about this next topic or even asking this question, but we're talking so much about debt here that I feel like it could be an important question. And I don't want this to get political by any means, but I'm curious to hear, the US has a huge student loan problem. That's a huge debt for us.

54:07And there's a lot of talk about that potentially being forgiven. And that's sort of a type of buyout you could argue. How do you see that all playing out? Do you think it's possible that student loans get completely wiped for everybody that has them from a federal level? If so, what does that do to the markets? And if not, where do we go? What is the solution to student loan debt? It's a touchy topic depending on one's politics because Bernie Sanders, of course, is notorious for that. And if you say that's a good idea, then you must be stream left. If it's a bad idea, you're extreme right. Just think about it.

54:39The student loan debt, I think, is 1.6 trillion or something like that. It's a staggering number. But when you think about what we did in the repo markets or what we've done in the treasury markets or what we've done for Wall Street in terms of the many trillions. And really, who does that benefit? I mean, the repo markets and the money market accounts don't benefit Main Street that much. And yet, we bailed them out to the tune of over a trillion dollars. If you had taken that same amount of money and bailed out student loans, it's my opinion that if you're going to bail out anything, if you're going to give a handout, I would much rather give it to a generation of students saddled with so much debt that they can't think straight and they can't make decisions.

55:14And that's not because I'm trying to make a political statement to get the support of millennials, but it's criminal how much it costs to get an education in this country compared to where I was for the last six months in Europe, where there's nothing like that. Now, there are big differences and reasons why. And I understand professors and universities in America are exceptional and they need higher salaries, but there's really no explanation for the type of costs for medical and for educational systems. It's a broken system. So yes, even if you're going to give a million or excuse me, a trillion to student loan debt, which would cover most of it, That would be money much better spent than giving it to the repo markets or add more liquidity for banks to continue to live on fractional reserve banking.

55:53So not trying to criminalize the banks and make Wall Street always the bad guy and the little guy always the good guy. But there's no doubt with the amount of money we've given to Wall Street in the last 12 years, if we had just bailed out 60 % of student loans, I think that would have been much better spent. By the way, for every member of Congress, there's four financial lobbyists who push an agenda that favor Wall Street. That's neither red nor blue. That's just an empirical fact. The fact is our Congress has been co-opted by financial industries for years. So you're not getting true representation in your House of Representatives or your Senate, whether that's a Democrat or Republican.

56:28They're bought and paid for. And that's just an objective fact. That's not an opinion being anti-Wall Street. Hell, I've benefited being a member of Wall Street for over 20 years. It's just, you've got to call a duck a duck at some point. So I think a lot of politicians, and certainly the Fed's master is Wall Street. It's a private banker's bank. It's not even a government institution, even though it sits on constitutional ab. I would argue it's not even constitutional, but that's another story altogether. But the Fed does not serve the main street economy. Its job is to provide liquidity to banks.

56:58That's what it was formed for. It's a banker's bank. The Fed and Congress and even the White House, Republican or Democrat for many, many years, has not used the Fed to bail out the real economy. It's always been for Wall Street, because politicians and, of course, central bankers by their nature, confuse the real economy with the stock market, which again, explains why stock markets can be rising as the real economy is on its knees. I think that's a short-sighted political need to stay elected by promising short-term solutions. Short-term can mean another 10 years of rising markets or five years of rising markets, that's very politically popular to deficit spend or print money in your jurisdiction or your precinct or your electoral college to say, I'm going to promise you a robust economy.

57:43They're giving you a robust stock market and they've confused the stock market with the real economy. That's a dangerous game. It looks good on paper for now. It looks like a living organism, just like Frankenstein. If you put a tuxedo on him and put him in the corner of room, doesn't look like a monster until he gets up with his arms out. But eventually, our economy is a Frankenstein. Our market is definitely a Frankenstein. It's completely artificial. But I think if we spent more money on infrastructure, on debt relief for students who could actually go and buy a house or a car and qualify for a loan, with interest rates at the basement of time, why are millennials buying more houses?

58:18Because they can't afford the houses, even at low interest rates. Because they're in so much debt, they can't get a loan, or they can't save enough money to put a down payment down. And real estate prices like bond prices are completely blown off the charts or overvalued because any instrument that survives on low interest rates goes up in price if rates are low. So people who put fancy face shots on their brokerage cards, real estate brokers are making a fortune right now because cost of debt is cheap. But millennials and most people can't afford even a low rate mortgage because they have so much student loan debt, or if they've defaulted on that debt or behind on that debt, they can't qualify for a loan.

58:54So it's a long-winded way of saying, yeah, without getting too political, certainly a big portion of student loans could be forgiven. That would be better for America than one more bailout for Wall Street. That's my short answer then to that. Going back to our conversation about 401ks, there's a relatively limited management capability for us in employee-sponsored 401k accounts. So how can we best position ourselves for what you've been talking about throughout this episode to help mitigate the risks you see? Again, this goes back to the point. First of all, if you're in a 401k, you've got a plan administrator who's probably put you in a 60-40 pie chart portfolio or a 70-30.

59:33That means 60 % stocks and 40 % bonds or 70 % stocks and 30 % bonds to pay on your age, with the idea being that bonds will protect you when stock markets crash. You need those bonds to be your buffer. So we'll give you a nice pie chart portfolio. The first thing I'd recommend in any 401k thing is to question very severely the intelligence of the old traditional 60-40 portfolio. Even banks like JP Morgan now are admitting that those probably aren't the safest things. And the reason that's the case is stocks and bonds are so highly correlated now. They're both bubble assets now because of all these distortions we've talked about.

1:00:08The Fed has supported or front-run the bond market for so many years that bonds are so overvalued that they're not really a protective safe haven asset like they used to be. and stocks, of course, are bubble assets as well. So if we have a market risk moment, your bonds and stocks are going to go down together. So the first thing I would recommend is that you don't think of bonds as a safe haven, certainly the way they were in my dad's era or your grandfather's era, or even in my early era. Bonds just aren't the protective asset they used to be. They're highly correlated. To me, a 60-40 bond stock portfolio was basically a correlated portfolio.

1:00:43So that's the first thing. The second thing that I would recommend is that they have some allocation to cash. Even though inflation is coming, even though there's risk that you're losing the purchasing power of that cash, you want to have dry powder for whenever this fantasy market of central bank support has its disruptive moment. Again, without trying to time that, you want to be able to buy Berkshire Hathaway at 50 cents on the dollar. And I think you need to have cash to protect yourself, A, from the volatility, and B, to buy when markets are showing blood in the streets. And so you buy at value.

1:01:18For a 401k, you can't just say cash, but you can put it into a money market or some type of cash equivalent. Most 401k programs have some type of cash equivalent. And it's Signals Matter. We show you how to diversify that portfolio beyond stocks and bonds. You need to be looking at commodities, precious metals, currencies, and you have to be actively managing that. Not everyday day trading, But every quarter, every month, or even sometimes every couple of weeks, as conditions and facts change, your portfolio has to change. This idea of just passively sitting back and biting a stick through downturns and then riding the wave through upturns was the old method.

1:01:54Those days are gone now. We're going to see many, many months of up and to the right until things go really wrong again. And if you're in a passive portfolio and you're not watching it all the time, you're at risk. But I think the simplest answer to your question, Robert, is A, avoid a stock bond concentrated portfolio. There are two correlates. That's very dangerous. And B, make sure you have a strong allocation, 30, 40, even 50%, depending on your risk, in a cash equivalent like a money market account, just so that you have A, that prevents you from losing everything if there's a 40, 30, or 60 % reversion.

1:02:29And B, that when markets do hit a bottom, which you'll never time the bottom, but you'll know it when you see it. When markets really start to go back to their old support lines, you can buy then, and then you can set it and forget it for decades. You want to wait for a bottom. If you're 70 or 80 years old, you can't wait for that bottom because if it takes 10 or 20 years to recover, you may not be here. If you have a retirement account, you can't afford to be all in right now at a market top. It's not the market top, but it's certainly a top. It's been a top for over a year and a half. But again, I would still be gladly in cash rather than chasing this top all in right now.

1:03:04And you want to talk to your advisor. Again, I'm not pitching signals matter, but we build portfolios that are far more diversified and uncorrelated than just stocks and bonds. You've got to be thinking about other asset classes. Robert Leonard I want to go back to that 25-page report I mentioned a little while ago and talk about a few more concepts from it. For anyone that's interested in this report, I'll put a link to it in the show notes. But in the report, you talked a lot about interest rates. Without getting too into the weeds, explain to us, millennial investors, what has been the interest rate environment for the last decade and what has been happening?

1:03:37Well, for the last decade, it's been a historically low interest rate environment. And again, it's not your fault. Your generation or anyone in the last 10 years wouldn't even know what high interest rates look like because the central bank, A, has set rates near zero since 2008, and B, they've been buying bonds. The Fed can set low interest rates artificially. To me, the bond market is more important than the Fed, but even the bond market is distorted. The other key interest rate I would look at is the yield on the 10-year treasury, because the higher that yield goes, the more and more dangerous it gets for the markets.

1:04:09The yield on the 10-year treasury in 2007 was 5%. Today, it's less than 1%. So you have this very, very low rate environment. And why is that dangerous? Well, right now, it's fantastic, because low rate, again, is the cost of debt. If the cost of debt is low, companies will take on more debt to survive, and they'll buy back their shares, et cetera. They'll use debt rollovers. So a low-rate environment is fantastic. It's a very important indicator. I look at the yield in the 10-year. When that starts to creep above 2%, 3%, 4%, the party's over. But right now, the Fed is effectively repressing that yield by buying artificially with printed money, government bonds.

1:04:46When that starts to end, we can talk about how that ends. But until it ends, markets will continue to be survivable. It's like if six-packs were only a dime in college, everyone would buy more six-packs. when interest rates are set low like this at the zero bound for over a decade, well, companies are going to be seduced to buy all those six-packs. They're going to go on a debt-addict binge. They're going to go on a keg party because they have no choice. It's too easy. You can just keep borrowing for so cheap. Keep borrowing. Keep buying back your shares. Keep issuing dividends on borrowed money.

1:05:17Keep rolling over debt. Extend and pretend. Stay like a zombie and just wander through the markets. So interest rates are absolutely critical. I think they're the most critical thing. And the Fed is saying, don't worry, we can repress interest rates forever and we can outlaw inflation. So trust us, we've got your back. And again, the Fed's a powerful, powerful force. So is the Bank of Japan or the Bank of England or the ECB. So you can see why it's easy to trust that, especially when market's hitting new highs. I would argue that the Fed can't keep interest rates down forever. And so that experiment, that fantasy will end.

1:05:53I don't know when it will end, but the way I watch it slowly die is I watch that yield on the 10-year treasury as it creeps above 2.5%, 3%, which right now people think is never going to happen again. And I understand why the Fed can control that. But once the yield on that 10-year, the cost of debt, the cost of that keg, cost of that six-pack, once it gets higher and higher, the party gets slower and slower and the hangover approaches. Robert Leonard, explain to us why you think this trend of declining interest rates can't continue anymore and why interest rates will rise in the future? I think they will rise eventually.

1:06:27I think it's very hard to say when, because like I said, as much as I'm appalled by central bank policy, especially since 2008, and as much as I can understand how it was a short-term emergency in 2009 to apply that policy, they've gone too far, they're addicted to it. So the Fed can continue this low rate policy for a long time. And I don't know precisely when it will end. No one really does. And I think anyone who tells you they can time the markets is not much better than a tarot card reader. But I think why it will end or how it will end is very simple. The bond market ultimately has more say over interest rates than a central bank.

1:07:05The hubris and arrogance of central bankers to think they can control the bond market like a surfer thinks he can control a tsunami. You can be a great surfer or a great sailor, but you have to have respect for the ocean. The forces of the ocean humble the best watermen on the planet. And the central bank is like a sailor that thinks they could control the Pacific or the Atlantic. That's incredible arrogance. And the power, the natural force of the ocean, like the natural forces of the bond market, I think will break the back of these central banks. And by that, I mean, at some point, a sovereign wealth fund or a major pension fund somewhere in the world from Singapore to London to the US is going to say, you know what?

1:07:42For all these bonds that I have on my book, I'm getting no yield. In fact, inflation adjusted, I'm getting a negative return. There's not enough yield for the risk on my bond books. I'm going to start selling my bonds and my treasuries. I'm going to start selling my 10 years and my 30-year bonds. There's going to be a sell-off in the bond market. And so when the bond market sells off, the bond prices go down and yields go up. And when yields go up, interest rates go up. And the Fed's going to have a moment of uh-oh when that happens. And their only choice at that time will be, well, if nobody's buying these 10-year treasuries, we're going to have to print trillions more to buy them.

1:08:19And I think at some point, the world's going to say, we're not buying that anymore. We're not going to accept that. That's a psychological and mathematical moment that's very hard to time. But that's one way. I think the bond market simply says no to monetary policy. Investors start to realize there's just not enough yield for the risk of holding these artificial monster zombie Frankenstein bonds. That's one way. The other way is, look, inflation is eating away at your returns. The central bank and the Fed and the Bureau of Labor Statistics says inflation is around 2%. The Fed wants to target higher.

1:08:54Suddenly, they have the magical ability to turn inflation up. That's all nonsense. But real inflation is much higher than 2%. It's closer to 10%. ShadowStats or the SGN alternate, everyone knows how college tuition is a classic example of inflation. As I said, the toll of the GW Bridge is a classic example of inflation. What it costs to see a dentist is a classic example of inflation, or any of these other costs that we all live with every day. But the Fed keeps telling us, well, we only have 2 % inflation. But the point is, at some point, inflation will increase. And when inflation increases, people will see that their inflation-adjusted returns are getting nowhere in their bond market, so they're going to sell more bonds.

1:09:33Another reason that bonds will sell off and rates by the bond market will go up higher than what the Fed can control. Robert Leonard Leonard And a third reason I think that inflation is coming or that rates are going to rise slowly and then surely is that the Fed is now, as I said earlier, going from being a lender of last resort to a spender of last resort. And And right now, the Fed has started in 2020 to actually use its powers to directly buy ETFs. And they will soon buy stocks and not just bonds. And they'll soon buy individual name stocks, like they're buying individual name credits. When the Fed starts to slowly inject money directly into the markets, into the real markets directly, rather than just buying treasury bonds, that increases the velocity of money.

1:10:17And when you increase the velocity of money, you increase inflation. The Fed thinks it could control inflation at 2%, like a sailor thinks it could control a wave to only be two meters instead of 10 meters, but they really can't. That's arrogant. The Fed will lie about how high inflation is, but eventually we'll all realize we're feeling inflation. You see a 20-foot wave, you know it's a 20-foot wave, even if someone next to you says it's only a two-foot wave, you're probably going to drown. And that's what's going to happen. And more importantly, as the Fed or any central bank tries to print more money to buy otherwise unloved or unwanted bonds, they're going to kill the purchasing power of their underlying currency.

1:10:54Again, that's why Bitcoin or gold are so successful right now. If you look at the purchasing power of the major currencies of the world, including the US dollar against, say, a milligram of gold, the purchasing power of every major currency is consistently going lower and lower. I'm not talking about the power of the dollar relative to the power of the euro or the strength of another currency. I'm talking about the actual purchasing power of the underlying currency, it's getting crushed. And that's why investments like Bitcoin or precious metals are going to be ultimately the best hedge against these central bank policies.

1:11:27That doesn't mean you have to be a Bitcoin bug or a gold bug. I personally favor gold over Bitcoin for a lot of reasons, but that's my opinion. But they're both, as I said, a middle finger to dying currencies and overbought or over exuberant central banks. And so that too, as currencies lose their purchasing power. That's another reason to lose faith in the bond market. And as bond market faith disintegrates, bond yields go up, interest rates go up. So I do think at some point, there'll be a disorderly spike in interest rates, like we saw in the repo markets. In a small example, you'll see that in the overall markets.

1:12:01And if interest rates go up, again, if the cost of beer goes up, there's going to be less parties at the frat house. If the cost of debt goes up, there's going to be less parties on Wall Street. And you can't keep that cost of beer for free forever, in my opinion. It's just a question of when, not if. Robert Leonard Some people listening to the show hear all this talk about interest rates and might be wondering what interest rate we're even talking about. When I first started studying finance and the financial markets, I didn't know the difference between the interest rate on my savings account and the interest rates we're talking about here.

1:12:32So I think it's a very valid thought to be having. So please tell us which interest rates we're even talking about here. Robert Leonard Yeah. I mean, the two most important ones I'm talking about here, like I said, is the Fed funds rate. That's the rate that the Fed sets for short-term bonds. It's kind of the guidepost of where the cost of money is going to be for banks when they're making intrabank loans or the LIBOR rates on corporate loans. What the Fed funds rate is the interest rate that's really critical for keeping liquidity or the cost of debt going in the financial market. So when I'm talking about interest rates, I'm talking about the rates that are set at the Central Bank and the Federal Reserve.

1:13:07But I'm also, as I said, that's the official rate set by the Fed and it becomes the rates that banks use to lend among themselves. And then that becomes what the rates that banks then send out to their customers, their corporate and institutional clients, and their private clients. So that central bank Fed funds rate is extremely important. But as I said, if the yield on the 10-year treasury gets too high, the Fed will have to respond to that. The Fed funds rate will eventually reflect the bond market, not what Powell or Yellen or Bernanke or Greenspan or the next Fed chairman sets it at. So those are the two key rates that I look at, the Fed funds rate, which is the official cost of debt for banks, and then the 10-year treasury yield, which is the real interest rate that everyone really follows globally because of our global currency status.

1:13:54When you talk about your rate on your savings account, which is probably less than 2%, that's appalling, that's so low, but that's not really the rate I'm talking about when I'm watching the interest rate moves. I mean, when you think about it, when rates on your saving account are so low that what does that encourage people to do? It encourages them not to save. So they're going to go out and spend. This is a direct initiative or intention of the central bank is to make it nearly stupid to save money because you're going to get no return on your savings account. But my point is, at some point, it's the same thing with your bonds.

1:14:25You're getting no return for your bonds. You're going to sell those. When that happens at a concentrated systematic level, in an aggregate level, that's when yields will rise and that's when the Fed will lose control of the Fed funds rate and the real market is the bond market, that will determine the direction of what banks will charge and what banks will ask for an interest rate. So those are the key indicators I look at when you talk about interest rates. I'm really talking about the yield in the 10-year treasury and the Fed funds rate. Robert Leonard We've had a great conversation today about the financial markets as a whole, but to round off the show, I want to get a little bit more granular.

1:14:59Talk about you personally, Matthew. What has been the most influential piece of advice you've ever received? It can be about business, it could be about investing, even just life in general. What piece of advice has had the biggest impact on you? I've had so many great mentors. Academically, the books I've read, teachers I've had, professional mentors. I'd like to say something famous from Emerson on self-reliance or William James Bryant. The best pieces of advice I had was two things. One is just a famous quote by Kennedy who said, you know, there's something immoral about abandoning your own judgment.

1:15:35And I think if you're going to have a judgment about anything, whether it's politics or markets or love or religion, you have to have an informed judgment. And then once you have an informed judgment, you have to stick to your own opinions, your own values, your own judgment. If you abandon your own judgment, there is something wrong with that. Another great piece of advice is don't wait for the meaning of life, create the meaning of your life. So in other words, you have to take an active role in how you make a life, and you have to take an active role in how you make decisions. And that's based on your own judgment.

1:16:05And how that really ties into investing is it's almost the same thing as being a contrarian. It doesn't mean being a contrarian for contrarian's sake, but the more informed you are, the more informed your judgment is. The more informed your judgment is, inevitably, it's going to be unlike the majority of people's opinions, because it's an informed opinion as opposed to a mass opinion or a consensus opinion. And all great investors, including Warren Buffett or Howard Marks or Baron von Rothschild, were ultimately contrarians, not just because they wanted to be different, but because they had more information.

1:16:36And as they got more information, they became better at what they did. And investing is no different. As you understand risk and you understand interest rates or macros, or even something on a stock picking side, the more informed you get, the more you trust your judgment, the more powerful your confidence is in any area of life. And in the markets, it's no different. You've just got to get more informed. You can't have someone make decisions for you. It's your money. It's very important. It's your investment. It's your retirement. Don't rely on a FINRA Series 63 registered financial advisor du jour to give you the same advice that everyone from Goldman Sachs, the guy down the street is going to give you.

1:17:15A set it and forget it portfolio, they'll take a fee on it. When the market's tank, they'll blame it on some external event, and they'll just say, bite a stick, it'll ride back up. That's consensus thinking. That's not informed thinking. That's abandoning your own judgment for someone else's judgment. And I think that's lazy thinking. It doesn't mean you have to just be a doom and gloom radical just to be sexy. You've got to actually be informed in your opinions. You don't have to agree with the thing I'm saying, but check on what I'm saying and make your own informed opinion. I actually enjoy having conversations with people who have different opinions than me, because I'll change my opinion if they inform me differently.

1:17:49But to answer your question, don't abandon your own judgment, but make sure your judgment is very informed. I think that's the best advice I was given is to be self-reliant, but also self-reliant based on doing the work to improve your own judgment and your own understanding of a given topic. So you actually have an informed opinion instead of just an opinion. Matthew, thanks so much for joining me again today on the Millennial Investing Podcast. I'm already looking forward to doing this for a third time. We'll do that probably again in a couple of months, but where can everyone listening today go to learn more about you and all the work you're doing?

1:18:26SingleMatter.com is where Tom and I give portfolio advice and there's tons and tons of blogs and there's the investment primer that you've referred to. It's on there that people can download. It's all free. It's all free. Most of the stuff on the website is front-end information. You can improve your information and judgment just by reading a lot of those reports. you can disagree or agree with them, but you'll at least have, I think, a more blunt understanding. If you want to have more specific portfolio advice, whether it's your core portfolio or specific ideas to invest in other sectors, you can become a subscriber.

1:18:57My colleague, Tom Lotz, a freaking genius on the backend with all kinds of signals and sectors and securities to invest in, and that's for paid subscribers. But for anyone who just wants to stay informed, there's a lot of free information right there on signalsmatter.com. And then in my other life, I love the two dimensions of my life because Signals Matter was really created for Main Street investors, like you said. But I come from a family office background and a Wall Street background. And my other life is in Zurich, Switzerland, where I work with Matterhorn Asset Management, which is for higher net worth investors.

1:19:29But that's purely a precious metals. We're the biggest private vaulting service for precious metal high net worth investors in Zurich and in the world, but we're based out of Zurich. And that's called Matterhorn Asset Management. And that's where I talk more about the specifics of currency devaluation, what's happening with central bank policies around the world, what that means for your wealth management in terms of just whatever currency you own. And so we solve that problem with high-grade, highly refined gold and silver products in Switzerland, and then we store it in Switzerland and Singapore.

1:19:59So for precious metals, I'm in Zurich. For securities and for stocks and bonds and portfolio questions, and for Main Street information for free, signalsmatter.com is where you can find me there. And of course, Rigged to Fail is on Amazon. You can get the book pretty much for free on amazon.com. Read it, agree with it, disagree with it, but it's full of a lot of good data points and that'll help improve your informed judgment on these markets right now. I will put a link to the book, a couple of the different reports we talked about throughout the episode and all the different resources that Matthew just mentioned in the show notes below.

1:20:32So if you guys are interested, be sure to go check those out. I've read through a ton of the blog posts. I've read through the book. I've read through everything. I really enjoy it. I know you guys will too. So I highly recommend you go check those out. Matthew, thanks so much for joining me. Matthew Feeney Okay, buddy. Well, thanks for having me. I really enjoyed it. It's always a pleasure. All right, guys. That's all I had for this week's episode of Millennial Investing. I'll see you again next week. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com.

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