TIP815: Lyn Alden on Why Fiscal Dominance Changes Everything

24:20If you were running a restaurant next to a manufacturing town or in a manufacturing town, you're by extension impaired as well. So both sector and geography. Now, the tricky thing is that the further this goes, the more imbalanced it gets. It can actually start to harm some of those winners too. Like if our industrial base is so kind of stagnated that the military can't replace its production as quickly as it could decades ago. So we can only make so many interceptors, for example, in a given month. It actually starts to impact the government in a way too, or those more in that dollar security or military industrial complex.

24:58And so if it gets imbalanced enough, it can impact almost everyone. But for the most part, there's that pretty clear segmentation of winners. So having the dollars, the global reserve status really is good for like America, the empire, or America, the coasts, America, the finance hubs. And it's really not great for America, the heartland, America, the industrial powerhouse we used to be. Those are generally on the losing side of that arrangement. 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.

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29:22But I feel like there was something to be said about making it a bit more simple and then start building on the thesis. And so I'm going to use that as framework to be talking about the investment case we have here for energy and oil equities. And that's something you talked about in the past, and you've been right about that. But if we just stay with oil here for a moment, we have a current oil shock, and that redistribute economic power to some extent. So could we simplistically say who are the winners and losers from this so far, and both across country level and then across sectors, and then perhaps build on that?

30:00Well, so on average, if a country is a net exporter of energy, they're doing better than if a country is a net importer of energy. But sometimes that gets oversimplified in media, because if you're in a country that is a net exporter of energy, it might not be as bad if and a net importer of energy, but your energy bills are generally still higher. Unless that country is, say, subsidizing its own energy with its own production, it'll look a little bit more of a socialist kind of energy situation. So barring that, in America right now, energy producers are doing fine. There's talking points about how the world's going to buy our energy.

30:37It's not like we have a ton of spare energy just sitting there. So that bids up our prices. So if someone is in America, but doesn't work in the energy industry, they're not really getting any benefit. And they're paying higher energy by extension. They're paying higher diesel prices because if these things persist, stores have to raise prices on all the goods they transport around on trucks and trains and all that. Tickets to fly an airplane anywhere, whether domestically or internationally, and higher rates of cancellation on flights because all these unprofitable flight routes are canceled that they don't think they can raise prices enough.

31:10For the most part, The vast majority of people do poorly when energy prices are higher. There's relatively few winners, those who produce them and those who invest in them. And there's some that are just kind of doing damage control by being in a country that at least is not going to have shortages. It's going to be somewhat self-sufficient. But the vast majority of consumers globally, including in those exporting countries on average, don't really benefit from higher energy prices. We generally want our raw inputs to be as cheap and abundant as possible. And whenever there's bottlenecks to shortages or high prices and there's raw inputs, that's when you get a lot of problems.

31:45Yeah. And I think it's also really important to be talking about nominal and real numbers. And I think we all as consumers have this natural tendency to be looking at nominal numbers. It's easier to relate to, like, things are expensive. And I'm not telling our listeners something that they don't know. But I think I want to use that transition to the next question about how the daily lives look different from the average US and Egyptian consumer. And I'm sort of like, at the time of recording, Brent is trading 110. So originally, I sent you the question asking you, how does the daily life look like whenever it's 100 and 150 in those two countries called the average?

32:27I know the average doesn't exist, but that's sort of like the primer. Robert Leonard Yeah, good question. So zooming out for a second, I think the world can take$100 to$150 oil. It's not comfortable, especially when you get there very quickly, like we have. But especially on inflation, you point out the difference between nominal and inflation adjusted are real. I mean, it's not record oil prices on an inflation adjusted basis. If anything, ironically, the gold to oil ratio, like oil is cheap compared to gold. And that's kind of absorbed all this kind of decades of money printing into the gold market.

32:59And so from multiple ways of looking at it, it's almost like$100 plus oils, like a new baseline, in a sense. That can encourage new production. And that's a reasonable balance, or at least the high double digits. $60 oil is, I think, not that sustainable because producers can't really make money down there for the most part. And so I think the world can, after some period of turmoil, absorb 100 to 150, even maybe a little higher energy prices. The higher you go from there, even at that level, poorer countries on average are going to be impacted first. So Egypt has something like 1 20th of the GDP per capita as the US.

33:41Now, when you factor out wealth concentration, you say, okay, what about the median? It's still something like 10x or more, right? So the median American has just way more buffer or purchasing power. Same thing with the median European, the median XYZ. And so higher prices of the pump are bad, but they're not as catastrophic. In Egypt, for example, they just had a month-long energy curfew, right? Because their natural gas import bill tripled. And when everyone's kind of scrambling for LNG, Egyptians can't outbid Europe. They can't outbid China. They can't outbid wealthier countries, Japan. And so they're more likely to just get acute shortages and just say, basically, you can't outbid the prices.

34:25So you just get less natural gas to deal with. And so they start doing energy curfews. So the shops and cafes and stuff will have to close at a certain time, which is especially tricky for a desert country where more economic activity happens on average later. So closing at 9pm in the suburbs that I live in here, people will be like, wait, things are not open anyway after 9. But in Cairo, that's a massive change. Now, the good news is it has eased a little bit there. So they've actually temporarily, they're ending their energy curfew because it's obviously very unpopular. But there's a risk that it could come back because energy prices have kind of chopped a while.

35:04But if they keep soaring, you can see this happen again. And so on average, developing country citizens are more impacted. But it's also, I mean, in the US and Europe, I mean, in the US, for example, stocks are near record highs, but consumer sentiment is literally at record lows. since it's been measured nationwide, going back to the 50s. So in 70 years of data, this is going through the late 70s malaise, going through the global financial crisis, going through COVID. Those were all low points. This is somehow even lower because people are working full time and yet having trouble making ends meet and not really being confident in the direction of things.

35:43And so again, it impacts negatively almost everyone. But yeah, I think the world can absorb 100 to 150 nominal oil prices, even though it's unpleasant when you make that transition. It certainly is not pleasant. I wanted to ask you about the relationship between public debt that we talked a bit about before and then social unrest, and then perhaps go back to the gas prices afterwards. Right. I mean, when you have high public debt, it's a symptom that things have not been in balance for a while uh so often aging demographics sometimes war but often just aging demographics and in the u.s's case we have just kind of a couple things are kind of happening at once we have record kind of payments to the older generation compared to the younger generation which is on average backwards from how you generally think about kind of investing in your future so we're kind of fueling older consumption and you know we're not really education or families buying their first house to start a family, those things are all just really expensive and kind of left for, you know, it's challenging.

36:46And so you start to get more just turmoil, just more, you get intergenerational warfare, like, you know, or you get just more polarization because everybody feels something's wrong, but no one's sure why. So you get, you know, cross the aisle kind of finger pointing and just a more extreme decision making in general. and a big part of whether a person or a company is doing well starts with the question, are you on the right side of fiscal deficits or not? So if you're in the business that is either receiving deficits or caters to those that are on average receiving deficits, you're probably doing pretty well right now.

37:23Whereas if you're in a business that is not really on the receiving side of deficits, and if anything is a little bit harmed by tight monetary policy, if you're a realtor right now, so no one wants to sell their homes because they locked in their 3.5 % mortgage. No one really wants to buy a home because they don't want to pay current mortgage rates and they can't really afford the high prices mixed with high interest rates. So turnover is very low, even though there's not been a collapse in real estate prices, but this turnover just has collapsed. So if you're in the business where you depend on volumes of real estate turnover, you're out of luck.

37:58And so it becomes very binary in that sense. Of course, the other variable unrelated is AI CapEx spending. It's so big these days. So if you're on the right side of kind of fiscal deficit or AI CapEx, you're on the good side of the economy. And if you're on kind of the losing side of tight monetary, at least not on the receiving side of fiscal deficits, you're impaired. And that, of course, leads to all sorts of political polarization. Instead of just kind of when there's kind of that strong of a thumb on the scale, there's bigger debates on where that thumb should go versus if that thumb was smaller.

38:29And then, like I said before, when you have over 100 % debt to GDP, and if like in the US, annual fiscal deficits are bigger than all bank lending combined on net. So the sum of new bank loans year over year is smaller than the annual fiscal deficit. And even net new bank loans plus bondage, corporate bond issuance, that's roughly the same size as the entire federal deficit. And so when you get that much public debt to GDP and those large deficits, when the central bank says, okay, we want to slow stuff down, we want to slow credit formation, slow money supply growth, so we're going to raise interest rates.

39:07The problem is you do slow down that private sector stuff to some extent, but then you blow up the fiscal deficit by an even bigger number. So you actually, in some ways, accelerate total credit growth by raising rates. And that's a state of fiscal dominance that Japan's been in for a while, and the US has more recently entered. Trey Lockerbie, Jr.: It would be odd if we had an episode together, we didn't bash democracy. Or at least I didn't bash democracy. And again, I always invoke this Churchill quote that it's, what is it that he's saying? It's terrible, but it's not as bad as the others. But it was quite interesting.

39:43For example, we had this spike in oil prices whenever we had election going on. I'm based in Denmark. So there was an election, then oil prices spiked, and then all parties went out and said, oh, price control. Because that's how it works in a democracy, and especially if there's an election. And why wouldn't you want price control? And firstly, we're thinking, let's say, okay, why wouldn't we have$3 cap on gas at the pump? Why not? Isn't it better if it's$3 and it's$4? It certainly shouldn't be$5. And so, So of course, in economics, you always have to ask, and then what? And so why is it not as simple as just saying, let's just lower whatever, let's just call it$3 because then people are happier.

40:30Why doesn't that solve all problems? Well, the shortage is because you're more likely to get shortages. So generally speaking, when you have an energy shortage, prices are going up. If you let prices going up, people can still get it if they're willing and able to pay the higher price. So it provides an economic incentive where if you're kind of using energy superfluously, you're more mindful of your energy usage. So you reduce non-essential energy. Energy still finds its way to the most essential areas of those willing to pay for it. And by extension, I mean, there is a somewhat unfair thing.

41:02If you're wealthy, you can just pay for it frivolously. Or if you're poor, even for essential stuff, you may have trouble paying for it. But at least it's still kind of getting on average to more important things. and whereas if you just do a flat kind of price cap there's less differentiation between essential stuff and non-essential stuff and two it kind of prioritizes instead of wealthy versus poor prioritizes who gets there first because if you only have so much energy good around the price is not going up so no one's rationing it so whoever gets there first gets it or the government says okay your license plate can get gas on these days and your license plate can get gas on these days so you have more government control and things and then two we We talked before about how wealthy nations can outbid poorer nations.

41:45So if you have a region that's doing price controls, well, those places are not going to outbid other places for energy. So if there's a limited amount of LNG or other types of fuels that can go certain places, those places that are willing to pay higher prices and able to pay higher prices are going to get that extra supply. And then even more structurally, if it stays elevated long enough, that's a signal to producers to produce more of it. whereas if the price is kind of artificially suppressed so that producers aren't making money at that price there's a shortage but there's an artificial price cap producers will say well we're not going to produce more energy because you know one if you make a lot of profits we're going to they're going to get windfall taxed away from us because we're the bad guys right now and or two there can be price controls that prevent us from making those profits in the first place so we're not going to take the risk of you know developing a multi-year project for new energy And so price is a mechanism of coordination, often without the parties even knowing each other.

42:43Just like if you say, okay, we're short energy, we're willing to pay more for it, who's a seller? You find sellers. And this price controls kind of distort that. It is such a powerful thing whenever you have price signals. And I think Adam Smith, and now we're again talking about financial easter, Even he said, with the invisible hand and everything, that there are certain things you probably shouldn't rely on your neighbors for. But by and large, if you don't allow the markets to have the market signals, they're not going to behave rationally. So right now, we see spiked oil prices from whatever kind of basis.

43:23And to your point, Lynn, perhaps this is the new normal, and we have to define what that means, and a long time horizon, and so on and so forth. but there is a lot of uncertainty in the market. And it takes a lot of time to ramp up the production. That's just the way the oil market works, for example. And so if we're like, now this is going to happen with homers or whatnot, and then the next day, no, that's not going to... You're like, okay, but if it takes six months for us and a lot of capex, and we need to have somewhat certainty before we ramp up production, so the oil price can fall, then we can't act.

43:59So as soon as you start to set those mechanisms out, and you also have companies who are saying, oh, okay, but does that mean that we're going to get a lot of windfall taxes to a point afterwards? So even if we do set up, do spend that CapEx, but then we just still don't make the money, not just because of the taxes, but also because of what can we then count on what's going to happen. So I don't know. I kind of felt like I came across this way too political whenever I say that. I probably have too much of a bias to free and open markets. But I think that there is, and perhaps this comes across the wrong way, but I think that there is something very powerful and beautiful about having those free and open markets because you are fixing a lot of problems.

44:40And it probably doesn't look like that at first glance, because why would we want to pay$3 and not$4 at the pump? But there are all the reasons why. So anyways, let me throw it back over to you, Len. Lenny VerMaas Yeah, I think free and open markets are kind of like, it's like the quote about democracy is like the least bad. It's like, obviously, there are winners and losers. There are situations that are tragic. But it's the best mechanism we know of to create prosperity and to efficiently move around resources to where they're needed most. and encourage the production of more resources that we need and to discourage the production of things that we already have too much of and that we're wasting labor and money and time on that are not being used, that a centralized system might just ignore those signals and just keep pumping out and things like that.

45:28So often, I mean, capitalism will be criticized for environmental damage. It's like, well, look at the environment under Soviet Russia back then. I mean, that was like, so often the case, it's all the kind of the evils or ills you could point toward free and open markets. It's often less bad than if you don't have those things. And if I appeal to people on the side that kind of wants those price controls or wants the more state intervention, I would kind of point out that the price controls are kind of like among the worst ways of doing it. So it's not to say that government can never be involved in something.

46:02They can still set the rules to have a level playing field. You know, you can't have child labor. You have to have certain building codes that don't fall down in a Category 1 hurricane. You can set ground rules so that efficient operators are operating in an environment of rule of law with efficient arbitration and all this and have a level playing field. The government can have a stockpile. I mean, that's the forward lay of looking at it is that when energy prices are cheap, the government can build a facility and have stockpiles. or it can potentially mandate, like Japan does, that the private sector has to have a certain amount of stockpiles.

46:37There's fewer downsides of having those things in place than something like price controls. So there are other ways that the government can help the private sector operate in its most efficient and fair way than price controls. Price controls are among the more interfering types that actually can more often be counterproductive. Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet? You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast. And with Plus 500, you can explore popular assets like oil, gold, S &P 500, Bitcoin, and more.

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50:35I think you can definitely point at free and open markets to say, this is a problem and that is a problem, and it's full of so many problems. But to your point, it may be the least bad, and then we have all the exceptions. And I guess, depending on where you are in your daily life, then the exceptions that you might lean into are different for all of the listeners. Since this is a stock investing show, I would be amazed if I didn't ask you about giving the combination of energy-driven inflation and a more fragmented global monetary system. Where do you see the biggest mispricings and opportunities in equities today?

51:11I've been fairly constructive on banks and financials because they're resilient against defaults. One is they already have pretty high levels of reserves and treasuries and fairly safe assets. Two, they're on the receiving side of fiscal deficits. So a lot of this interest expense is going to banks and financials. So I think they're pretty cheap. And so I've been using them as a value dividend play, including US ones, Latin American ones, and sometimes elsewhere. I've been long energy. I didn't rush to buy energy because of this crisis, but I've already been long energy and energy pipelines and things like that.

51:48I think that eventually software as a service stocks will get to the point where they're dramatically oversold. I think nobody wants to be a hero and rush in and buy a falling knife. So it's like people want some sort of either technical bottom or like a signal, or they want to see more signs that these companies' cash flows are not being as impacted as much as the bears think. So it's like, I don't know what that level is, but it's an area that I'm watching very closely. There's one stock I started to get into probably a little early. And then there's other ones that I'm watching to say, okay, I'm not going to be premature and just get all my capital in and then be down another 30%.

52:28And then, you know, but it's like I'm potentially layering in and at least watching very closely the software space. Because I think that the baby will be thrown out with the bathwater in some cases. I have been on the more gross side. I mean, I have been bullish on semiconductors, even though it's consensus. I think the consensus was right there. I mean, now it's maybe getting overdone, but I think the consensus is right. And whenever that turns against semiconductors, that's generally when I try to get back in. The value investor in me doesn't like things that have gone up a ton. So I tend to get out a little bit early.

52:57but I tend to look for dips in those things to get back in because I think those are real bottlenecks. And so I think there are still plenty of opportunities in the market in the US globally. And it really comes down to valuation and just how solid something is. Something that's very solid. And I'm just shamelessly going to say that this wonderful book, Money Without Borders, it's Barry Eichengreen's new book. His book's always fantastic. He's great. Yeah. Yeah. I think his new, have you read it, Len, his new book? I've not read his newest book, no. Okay. So some of the books are a bit more technical.

53:33I think this one reads a bit more like, I wouldn't say it reads like a novel, because I think that's probably because I'm such a nerd whenever it comes to financial history. But it's significantly easier to read than many of his other books. Anyways, he says in the book, and I'm just going to quote this here. International currency status depends on the issue's ability to forge durable geopolitical alliances. Central banks and governments hold and use the currencies of their alliance partners. Doing so is a gesture of goodwill. Alliance partners are seen as a dependable stewards of a country's foreign balances.

54:07Now, to what extent do you think the US still benefits from that dynamics today? And as the global system becomes more fragmented, Are we seeing any meaningful changes in the strength of durability of the dollar's reserve status in the current environment? Yeah, I think, like I mentioned before, we've had decades of these imbalances. And while I do think that the US at one time benefited from having their reserve status, especially during the Cold War, I think it was a massive tailwind, and then even a little bit afterward. I think now the de-industrialization we've had from being the reserve currency issuer is now a bigger factor than how well New York and the government have done by being dollar and dollar security exporters.

54:53To the point where, like I said before, even the military is like, why can't we build enough stuff? And it's like, well, that's what happens when you de-industrialize your industrial base. When you produce one-tenth of the steel that China can do, for example, their economy's got to balance the entire opposite way. And so I think it's interesting because all those alliances are really important in the beginning and middle period of growing and maintaining that network. The weird thing is that at a certain point, it takes a life of its own where you have this network effect. People often refer to the petrodollar.

55:24And it's like, okay, if a handful of countries decide to price something else, their energy outside of the dollar, that they could unravel it quickly. But it's actually more resilient than people think because the biggest factor is actually the dollar-denominated debts, the cross-border dollar-denominated debts. And depending on what measure you look at, there's something like 18 trillion in cross-border dollar loans and securities that are mostly not owed to the US. They're owed to all these different entities around the world. Some entity in Brazil will owe dollars to an entity in China, for example, or some entity in Africa will owe dollars to an entity in Europe.

55:55And there's a game theory where it's hard to be the first to default. I mean, it's not like the whole world can just get together and just default on all that and say, we're doing a new system now. We're more like you'd need a very extreme situation for that to become a real possibility. In general, the dollar creditors want their dollars paid back to them. And the dollar debtors, when their bills do, if they're the first to default, they're the one that gets the horrible credit rating and no one wants to lend to them again in the future at any sort of reasonable rate. And so all of that cross-border dollar debt represents inflexible demand for dollars.

56:30And that can change over time. I mean, a creditor nation like China can say, okay, here's dollars, pay back your dollar loans, and now your debts are dominated in our currency, right? And we'll give you a swap line, right? So there are piecemeal ways to slowly chip away at that network effect, but they're very kind of long processes. Kind of like how reshoring an industrial base is a really long process. You can just snap your fingers and say, okay, we're going to produce as much steel, electricity, manufactured goods as China, or we're going to move that to other countries. It's way harder and longer than it sounds.

57:05And the same thing is true for the dollar system. So yeah, I already think we're in a world where the US, we're kind of in an intermediate term, we can like right now we're acting like a wrecking ball, but we don't really see any sort of uptick in de-dollarization because again, those network effects are very strong. Now, if you do this for many, many years, you increasingly incentivize other workarounds. Like when we sanction Russia, we force them to do business with China in their own currencies, for example. And so I think that the whole BRICS and Shanghai Cooperation Organization, kind of the China-centered rest of the world, the non-West world, is a growing consortium of bilateral or in some cases bigger moves to de-dollarize payments.

57:51And I think the uptick in gold usage is part of that. It's not that Chinese currency replaces the dollar. it's that one neutral reserve assets like gold gradually replace the dollar as a reserve and two that just more payment options than just the dollar exist at scale which is that if a country sanctioned they can still do business in in other currencies and i think those are fully underway so the dollar kind of gradually goes from becoming like the only game in town to like the biggest but still a plurality one of many big options and part of that is breaking alliances. But part of that is even if we were just a completely nice neighbor, we were nice to everyone, our deindustrialization process still eventually impairs our ability.

58:37Because when China has already replaced the US as the biggest trading partner with the vast majority of countries, that's already a huge factor where they can come in and say, hey, we want you to use our currency to buy from us. And of course, you can use our currency to buy all the goods we sell you. And we're your biggest customer. We're your biggest trade partners. We want that now. So there's a gradual shift anyway, even if we were super polite. And of course, us being more erratic or belligerent around the margins can potentially accelerate it, but it's still up against those big network effects.

59:08Yeah, I think it's very important. And it's going to be a theme that we have throughout this episode that it takes a long time. It's not going to work like one, two, three, here's a tariff, and now we can produce this widget. It's like, no, we can't do that. But we see something similar with a lot of refineries where it's like, no, we're not getting the sweetness of this crude oil to our refinery, and that's how it's being set up. So now we can't refine it, or if we are, it's going to be super, super expensive because it's going to more or less destroy the equipment that we have to refine the crude in the first place.

59:40And so it's kind of interesting whenever you're seeing all of these things unraveling. And then at the same time, for example, whenever you look at cross-border, even for Chinese trade, how much of that that's not in one right now? It's incredible. And you would be thinking, well, they're such a big trading partner. They must be doing that for all of their trades. Not at all. And so thank you for paying some color around that. Speaking about great books, I'm sure you're familiar with this one here. I'm holding up to the camera. For those of you who are listening, Lynn Olden's Broken Money, I can't help but continue to speak to you about this wonderful book, you and everyone else.

1:00:20And And one of the favorite parts of the book is whenever you talk about Coca-Cola effectively showing the US dollar and about using leverage intelligently. And it made me think of this wonderful quote from Buffett on leverage. And he says, if you're smart, you don't need leverage. And if you're not smart, you have no business using leverage in the first place. And I love that quote. There are so many great quotes. But of course, whenever it comes to Buffett, one thing is what he's saying, another thing is what he's doing. Trey Lockerbie, Jr.: And he is the master of using modest leverage, and he's been doing that always.

1:00:54Trey Lockerbie, Jr.: And so more recently, well, in the history of Buffett, more recently, actually some time ago now, but famously, he issued these yen-denominated bonds, and they were close to no cost. And then he, of course, used the proceeds to buy these high-quality Japanese equities. Trey Lockerbie, Jr.: And so whenever you hear a quote like that, you have to think about what is it truly that he means. And we're not talking about using leverage as in credit card debt, 30 % interest rate, and then you would go on to your Robinhood account and do, I don't know, out of the money call options expiring the next day.

1:01:27That's not at all what we're talking about here. But my question to you then is, how do you short the fiat currencies in your own portfolio? And how do you think about using leverage to enhance your real investment returns, if any? Good question. So yeah, I operate fairly unlevered. I occasionally use leverage, But for the most part, I look for other entities that are using it effectively. One of the things I've said before is that the best product that Coca-Cola or Procter Mabel ever sold was their bonds. Or another way of looking at it is Coca-Cola has been around for over a century. They're almost always profitable.

1:02:01They've been profitable longer than we've been alive. Why do they have any debt? Why do they have$40 billion in debt? And the reason is because they can. It's an arbitrage. Especially pre-COVID, before higher rates, they could borrow at 3 % for 30 years or 20 years. That's basically shorting the currency. And whenever you can borrow at a rate that is much lower than money supply growth, so if dollars are growing in supply by 7 % a year, and you can borrow at 3 % and lock in that rate for a super long time, you can use that money to buy scarcer things, including your own stock, an acquisition, more equipment, real estate.

1:02:37You can buy all these things. And so really the winners of the system, of the fiat system over the past, call it 40 years, 50 years, is those who short the currency in a safe enough way that they don't blow up during recessions. So they're not the most levered, but they're structurally, cautiously levered while owning very high quality stuff. And Buffett, he uses two layers of leverage. One is simply by owning equities, he's benefiting from that because equities are already doing that. Coca-Cola is already doing that, for example. Apple's already doing that. Apple just famously So he didn't have to issue a ton of debt, but it was like the most attractive bond in the world.

1:03:17So it just issued tons and tons of debt, bought back its own shares. And it was a huge gain for Buffett's portfolio, Berkshire's portfolio. Same thing for Coca-Cola, same thing for many others. So he owns equities that are doing this game. Structurally short-fiat currency owns scarcer things. And then two, because he smartly got into the insurance business. It's one of the best decisions he's ever made. because insurance is one of the best types of leverage. The whole point is you take in premiums and then you owe payouts along the way and you're holding this float. You're holding like, unlike a bank deposit that can pull that at any time, you're holding this kind of locked in leverage and you can invest that leverage and get a return on it.

1:03:59And most insurance companies will buy a bunch of bonds and make 4 % and Buffett will, you know, he'll own enough bonds to have enough, low enough volatility, but then he'll go out and buy blue chip stocks. So he's buying entities that benefit from leverage in their own right. And then he's buying them using insurance float leverage on top of it. So he's got this very cautious two stack of leverage that is very resilient to most crises. And then occasionally, like you said, he'll go out and make other idiosyncratic leverage decisions. So those Japanese trading companies that he bought, they themselves are already quite levered in a good way because they're borrowing yen at near zero.

1:04:39they own scarce assets they own like commodity deposits and convenience stores and supply chain logistics you know things they own all these hard assets i actually and i'm still long those i bought those years ago too i didn't do it on leverage because i just benefited from their own leverage but so he buys these things that are leveraged but then further because he's berkshire and he can do really big things he can borrow a ton of yen at low rates and then buy these entities that are themselves levered, kind of like the insurance float situation. So that kind of two stack of leverage when applied prudently is how he's kind of made his fortune.

1:05:14And I think going forward, it's a little bit harder because now we're no longer at a 40-year period of falling interest rates. So when you have 40 years of falling interest rates, you have kind of prices of everything kind of structurally go up. Interest rates keep going down. You can keep refinancing at lower, lower rates. When interest rates are kind of flat, choppy sideways, and asset prices are maybe no longer as structurally up as they were before, because they're already at higher valuations, because they've already benefited from rates going all the way down. It's less clear of a thing.

1:05:46I think it'd be even harder for Buffett to do over the next 40 years than it was over the past 40 years or 50 years. But the same general principle still applies. In my personal life, for example, we got a house. We didn't need a mortgage, but we're like, if they're going to if they're going to let us borrow at 3.5 % for 30 years, do I think my investments... Should I sell equities? Should I sell things that I think are going to do better than 3.5 % to just buy this house free and clear? No. And the same thing, we have an Egyptian property, money supply there is growing by 20 % a year or so. And we could borrow the equivalent of 4%.

1:06:20It's like, all right, we'll make that. It's like a seven-year deal. And it's like, I'll short the Egyptian pound for 4 % a year for seven years, if you'll let me. instead of having to sell equities to buy that property. So that's kind of the only place I use a kind of like real estate tied, low interest rate, non-callable leverage from time to time. But for the most part, I let my entities, my equities do it for me. Wow. So you're paying the equivalent of 4 % in Egypt on a property? That's unbelievable. Wow. Yeah. Their whole mortgage structure is different. So they actually, it'll be structured so that it doesn't look like an interest rate, but you can calculate what the effective industry is so it's basically saying okay you can buy this house for this pound amount today or you can do this four-year payment term or this five-year payment term six seven-year payment term and these are what the payments will be and when you kind of just do the math then okay all this payment you know you get your spreadsheet out and you see all those payments you say what effective industry am i paying then on all those payments compared to just buying the house lump sum and in our case it came out to under four percent so i'm like well oh, I'll take the longest term you'll give me then because the Egyptian pound's growing by 20 % a year.

1:07:33And of course, they kind of temporarily kind of artificially peg it to the dollar from time to time, but then those pegs break. So yeah. Wow. Fantastic. Thank you for sharing. I hope the listener don't take away from this episode that they should not use leverage and it's only Buffett who can do it, but also don't hope they leave here and they're like, oh, I need to take on debt and invest in all kinds of stuff. I think the takeaway I want to give people is they really need to understand currencies. That's where it all starts. And I'm shamelessly going to say, if you really want to understand currencies, you need to pick up Lin's book, Broken Money.

1:08:12Perhaps you also need to pick up Lin's new book. I really wish I could advertise that here, but you're doing that perfect. I'll do it. Yeah. And what's the name of the book, Lin? The Stolgard Incident, sci-fi thriller. Trey Lockerbie, Ph.D.: Wonderful. And so I really wish I could advertise it here on the video if you're following along the video, but I ordered it as soon as it came out. This is a bad advertising for the German Amazon. It takes a month for the book to arrive, so I still haven't gotten a chance to read it. But actually, I wanted to weave a bit of investment into my next question here about the book, because I often find inspiration for my investments in the most unlikely places.

1:08:48I'm curious if you learned anything new about investing from writing your new fiction book, the show got incident? It's an interesting question because I'm not sure I learned anything new about investing, but I think I learned new about technologies, right? So the engineer in me wants to try to make things realistic where possible. I'm not fully committed to hard sci-fi, for example, but when I extrapolate what a society could look like 50 years from now, which is roughly the setting of the book, I inevitably have to go through an exercise of thinking, okay, what does the world look like in 50 years?

1:09:20What technologies kept expanding it out? what rate, what technologies hit ceilings and maybe stagnated. For example, if you look at the Jetsons or just any sort of visions of the future from decades ago, they thought our aerospace capabilities would be way better today than they are. And today what happened was we ramped up our aerospace capabilities dramatically and then we kind of hit a wall. We had the Concorde and we don't have that anymore. They used to be shorter for civilians to get from the United States to London than it is now because we never really could find a way to make that economic and safe.

1:09:54We kind of hit these hard limits and maybe eventually we can pierce past them, but it's not like a linear improvement. With aerospace, it's like once we had the combination of hydrocarbons and aluminum, we kind of fixed thousands of years of not making any progress on flight. We made all this progress and it's been a one human lifetime until we ran into a ceiling. And then we kind of only incrementally better. Like the electronics in planes get better. We added wingtips. But for the most part, a plane today looks the same as a plane from 1960. And as kind of part of writing the book, I said, okay, what things keep getting better?

1:10:27How dense is computing in that? Do we run into kind of fundamental computing limits? How good does AI get before it kind of runs into certain limitations? How dense can batteries become in that time? What will those batteries look like? What types of energy are people using? Is it economically flourishing or is it economically stagnating? And if so, what's the wealth concentration look like? So I think it was more an exercise of seeing kind of the comparative rate of technological growth, which then can influence investing more so than directly coming up with like investment ideas from the book, if that makes sense.

1:11:07I love that. It makes me think of the Peter Thiel quote, the problems are flying cars and all we got was 160 characters. I know that's probably a bit extreme to think about like that, but you bring up such a good point. We used to get around faster than what we do today. It's kind of extraordinary whenever you think about it. Lin, this has been amazing as always. I have now for the fourth time told people to go out and get broken money. But I'm also going to say, make sure to check out Lin's blog. It's absolutely amazing. I print it out every time that there's a new edition. And I sit there with my highlighters like, oh, this is so insightful.

1:11:47And so this is unbelievable. So still, I don't know if I've advertised your content enough, but Lynn, if you have anything you want to point people to, please do so. People can check out lindald.com, Broken Money, The Stolgard Incident. And thanks for having me on. Always happy to be here. You bet, Lynn. Thank you so much.

1:12:17is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principle, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. hosts guests and the investors podcast network may hold positions in securities discussed and may change those positions at any time without notice references to any third-party products services or advertisers do not constitute endorsements and the investors podcast network is not responsible for any claims made by them copyright by the investors podcast network all rights reserved