Transcription
There are three things that are going on now to great extremes that have not existed since the 1930 to '45 period. It affects everybody you know, and so I started studying history; it's important to know those three things and then to understand them well.
The first is what is going on with money and credit. When you get to something like a zero interest rate and you need buying power, the government needs buying power, but they can't tax it. So what we have is the production of a lot of debt that the Central Bank prints money and buys that debt to spend. The last time that happened, in the last few years, it happened starting in 2008. Interest rates hit zero; they couldn't lower their interest rates, so they had to print a lot of debt, and the government went in and bought it. Okay. And we're coming to the end of a debt cycle, so this is a big thing, like, because where does the money come from, and who will get what? The government will now determine that, and then they'll print it, and it'll devalue money. Okay, this is, and how money flows, a big deal. So that's number one.
The second one are wealth and political gaps that are causing great conflicts throughout history. There's always been the main things that everybody's always fought over: money and power, particularly political power. So what we have is a situation when you have a large wealth gap and you have an economic downturn, particularly if you put a lot of debt in at the same time, you have a fight. I mean, that's been true through history, and it's reflected in the political gap. So the political gap is—it's a classic political gap: Left, Right, capitalist, socialist. Well, how do you distribute? How are you going to deal with that? That becomes the other, and how you fight. So that's the second of the two: this wealth-political gap that's causing the conflict, and it's coming at a time where we don't have much money because we don't have a good financial position. We're printing and putting it out with made-up money, meaning what happened like COVID was such a good example. A lot of people and companies had falls in their income that would be ruinous if checks didn't go out; we would have had a revolution. And so those checks—and how do you save everything and so on. Okay, so, and it's not like the government had real money, so made more debt, and then the Federal Reserve printed it. You know, the checks went out, which diminishes the value of money and so on and changes things.
So then the third thing is the rise of a great power to challenge an existing great power. So the rise of China to challenge the United States. In all history, there are World Orders. What that means are the dominant power; you know, it's like in nature almost, the big bull or something. Anyway, there's the dominant power, and then what happens is in 1945 we entered the American World Order. The United States won the war, and then in 1945 the winners of the world carved up the world. We had 80% of what was considered money at the time—gold—80% of the world's money essentially; we accounted for half the world's economy, and the rules were set in the United States basically. That's why the United Nations is in New York; the World Bank and the IMF are in Washington because we began the American Century. And then we are now at a time—we've never had somebody, another power, challenge in the same way. There was the Soviet Union, but they were always a fraction of the size economically, so couldn't compete on that same basis. They had nuclear weapons, but they didn't have the economic power and so on. But now we're dealing with China coming on as a power. I spent a lot of time in China over the last 36 years, by the way, and I admire how they're doing a lot of things. I mean, I know it's controversial to say that, but in terms of, like, they're a power—whoa—like since I started going there, their average income has increased by 30 times. So they're a comparable power, and they're also growing faster, and so that has an effect.
So those three things are things that never happened in my lifetime before, but happened before in history, which led me to do the studies of what happened in history and the lessons I could gain. It affects everybody you—you know, it affects like, we know, let's start with ourselves most importantly. Forget about the outside thing; can we be healthy and strong, and what do we need to do, like, to know you have to be in it together, like if we can row in the same direction. Okay, if we can have thoughtful disagreement and get past that, if we can be in it together, like the wealthy and the poor—it sounds so difficult, but at the same time, if you read history and you see what happens when it's not—when you have a civil war, like we could be on the brink of a civil war—that sounds so crazy, but the truth is in most countries almost every century it was a civil war or a revolution, some form of civil war-revolution. So it's almost inevitable that we're going to have something. Okay, you either resolve it, or you start fighting so badly that you really—once you cross a certain line, there's no coming back because you do the damage, you demonize, and that person's such an enemy, or that class of people is such an enemy that the communication's gone, and the fight—well, you see this in politics today. In other words, is there a respect for the system and a mutual respect of trying to resolve these types of things, or will they go to any lengths to win? Because a constitution or law will only carry you so far. Okay, okay. There has to be an element of respect for it, right? You think about—I want to distinguish; there's big differences in opportunities. So let's say supposing you have two people of comparable opportunities. The marshmallow test is: you take a kid and you say, okay, uh, you can have one marshmallow now, or you could have two marshmallows in 15 minutes if you don't eat the first one. Once you start to realize that the first—third gratification is going to make you better and so on, and you start to count how many days, weeks, months, or years can I live if I don't have money come in, and you start to focusing on that, that's the first step. Okay, like the marshmallow test. So I want to save; you got to start there. Then if you do that, you're necessarily going to go save in what, and then you'll start to get exposure how these things are different. Okay, then you start to care; I can have one of these and one of those, and you start to experience, and then you start to learn, and basically that's what makes the difference when it comes to the money. Now at that moment that you don't want it, you have savings; that means I want savings. So the next thing inevitably that's going to come at you is: where do I put it? And then you get your choice—choices—and then you experience it, and you learn. I think first calculate how many days, weeks, months, or years you can live on your savings, because when you do that you'll gain security. So look at how much you're spending, and then say how much do I need, and whatever that number is, you're going to need more than that because it may go down rather than go up. So now, do I have a year's spending? I think you start there, then you start to think what are the things that are most important for me, and then you start with your business or your residence that have a symbiotic relationship and that you know well. If you start with your business, okay, you're closer to that; investing in yourself, whatever that may end up being, that may be your best investment. But if you're in a job, that's not the thing; you're in a different position. And then I really think there's something good about your home, a basic thing about your home, because it's nice forced savings, and it also means that you fix it up, your saving, you find out there's, oh well, if I add this thing or that thing, and you're enjoying it. So when you're enjoying it and you're controlling it and it's yours and so on, that's pretty good, you know, if they keep mortgage tax deductions and so on, you know there might be some benefits to it also. Okay, but that's not a black and white answer, you know, so you could take a short pencil and say, is it better to rent or buy? Okay, that's a different question, but by and large, am I going to move, you know, all of those other questions. So when you start with, okay, what is it that's close to home and how much you need—a certain amount that's liquid; in other words, you got it in your house, you got to make a mortgage payment or something, and all of a sudden, you know, it's not liquid, and you lose your job, well that can cause you trouble. So how much do I have that's liquid? How much do I have that's not liquid? Okay, and you start to get those things right; pretty soon you're getting yourself in good shape, and then you're also having some experiences, and then you go beyond that. So you start to, okay, what's a stock? What's a bond? And then you know, you learn through experiences. I learned through my experiences. I started when I was a kid, 12; I used to caddy, and I took my caddying money and I put it in the stock market, and I was lucky. What happened to me, by the way, is I took my caddying money and I bought the only company that I ever heard of that was selling for less than $5 a share, and I was really dumb; I thought I'll buy more shares, so if it goes up I'll make more money, and it was the only company—it was a company that was about to go broke, but some other company acquired it, and it tripled, and I thought, ah, this is an easy game, and I like easy money, but you know, you experiment and you learn. You earn $100 and you spend $105; that's misery. If you earn $100 and you spend $95, you'll have a good life. Life, basically. I know so many people who don't earn much, but are there because if you start to think about what it is that it costs you to live in terms of, let's say, the basics, you know, give me sleeping, give me the food, let me be educated, and so on, so forth, I think most people can get themselves in a position where they're net positive. So if you can be net positive and you could do that, you know, that's number one, then I guess it was the list that we went to, you know, the second is, you know, what do you do next in terms of what do you need, what do you invest in, and then avoid the following mistake: the most common mistake of investing, thinking that the investment that did good is a good investment. People rather more expensive the things—quite often those markets that did really, really well became more expensive, and everybody—smart money is all the time comparing them and competing. So what happens is the naive money buys the thing that was hot or is hot, the thing that has been terrible, which might be the thing that's beaten down. So I would say also an important element: diversify, because what I learned about this is that first of all, all investments compete, and it's not easy to tell whether one investment is better than the other, because if people could do that, life would be—be easy, and everybody make a ton of money. And this is a competitive game that's very difficult to compete in. So it's very difficult to say which one's better or worse; you could take experts and do all sorts of tests, and you'll find out that they can pick that, and you can't tell whether the worst ones are going to be better. So because of that, you understand that even picking the best ones is difficult, and particularly if you're naive. Like we spend hundreds of millions of dollars each year on research to try to give us an edge. Okay, now you've got to compete with us. So competing in the markets is more difficult than competing in the Olympics, but there are more people who try harder in order to do that. So it's a zero-sum game, but diversification will reduce your risk without reducing your return; that's critical.
I started studying history, and I found out the same thing happened on March 3rd, 1933. Roosevelt did the exact same thing for the exact same reason, leading to the exact same result. And so studying past periods that didn't happen in my lifetime—like we haven't been through a war before, and we haven't been through a civil war, we haven't been in the circumstances—so the three big things that are happening in our lifetimes that we have not been through before are the creation of an enormous amount of debt and printing of money to monetize the debt; that's number one, and so we'll talk about inflation and where we are in that cycle, and I'm like a mechanic; I'm not ideological; I'm just like, what are the cause-effect relationships? How does that dynamic work mechanistically? But it produces inflation. Uh, the second, but very interrelated to this, is the large internal conflicts that we are having: populism of the left and populism of the right, and values differences that is producing a conflict. And populism means that some representative who will fight for me on my cause against the other side; that means not compromise, not be in the middle, but to fight to win at all costs. And when we have that populism, brought about also by the largest wealth gap differences, largest opportunity gap differences and so on, that type of conflict I have never seen in my life, but that also happened in the 1930 to '45 period, and so I needed to go back and then study that over time. And then the third is the great power conflict. When 1945, when this world order began—as all world orders, there's a war, there's a dominant power; the dominant power sets the rules, and when the dominant power sets the rules, uh, then you have a period of peace and prosperity. And so the United States in 1945 had 80% of the world's money; it had half the world's GDP; it had a monopoly on the military power, and so we came into the American World Order. That gap, that power gap, has shrunk to be approximately equal with the other side, and we're having a great power conflict. So you have to go back to that period of time, and I've seen that period of time happen repeatedly. When these three things happen repeatedly, it's a very dangerous set of circumstances. So we are in a position—on the financial one—to be in a position where you cannot raise living standards by raising money and credit. In other words, you—if you increase money, then the value of money is going to go down, and one man's debts are another man's assets. And so when they get negative returns by holding a debt asset, they're going to sell that debt asset, and that produces a problem, and that's over a period of time. And so the Romans, for example, put less gold into gold coins, and so you saw it in its way, and that certainly produces kind of the inflation because you can't raise living standards by printing more money. So we have that going on, and so there's that dynamic of—where is a storehold of wealth? The purpose of a currency—there are two purposes: a medium of exchange and a storehold of wealth. A storehold of wealth means you buy its debt and its assets, and you could save in it, and people believe that cash is a safe investment, but they're seeing that what happens is it's losing buying power, and it will lose buying power, so they start to realize it's not a safe investment. Inflation of last year: about 8%; interest rates were nothing, and so there was an 8% change in buying power. That kinds of changes and sort of reinforces the inflation cycle. We pay too much attention to one currency in relationship to another currency and not enough attention to the fact that those aren't the choices; it's a choice for transactions, but it's not a choice for storehold of wealth. So if you're holding European euros and EUR-denominated debt and you're getting a negative interest rate or thereabouts, and the same is true in Japan, and you're not making up with inflation—none of those are good. And like in the '30s, they all depreciated; they all went down in relationship to goods and services and other asset prices. So what you see is all the currencies along those lines are sort of tied to each other, and they're bad storeholds of wealth, and that's why you see moves to other assets. It pays to borrow, and/or if not borrow, but put your money into assets that maintain buying power. So you see it happen in all the different ways. So look at whether what you're holding in the form of that cash-denominated, and that'll be a debt instrument; that's how you hold a currency in order to have a storehold of wealth. Look at its real returns. The Fed understands—and not central banks know—that when inflation is undesirably high and the economy is relatively strong, you put on the brakes; and that when the reverse is the case, you put on the gas. And they don't understand, I think, monetary inflation enough. What has happened is that because they put on the gas so much, have allowed interest rates to be so low—as I say, in many cases, negative interest rates—and they've made liquidity so abundant that not only didn't you have to pay interest on your debt, but you didn't have to pay principal on your debt, because they would have interest-only loans, and they would have low covenants, like it's easy to not meet your debt requirement. Companies borrow, individuals borrow, interest-only loans, and when there's no interest rate—basically means the stuff is free—you can buy houses, you can buy all sorts of things on that basis, and the world has adapted to that, and they did that at a very low real interest rate, a very low interest rate relative to inflation, and then they printed a lot more of that money and so on, and so inflation is going up. So mechanistically what that means is now we have a lot more debt, and we have an economy and markets—financial markets—that the pricing is structured based on those very low interest rates and that amount of liquidity. So when you go through the calculations—when I go through the calculations—and I—I figure, um, a high enough level of interest rate to provide a decent real return is for a holder of the debt is much too high of an interest rate for the markets in the economy, but you're going to have an inflation rate that's above the interest rates, and that's not going to be desirable. So investors want to sell that, and you could see it as interest rates rise; you can see its effects on markets; you could see the effects on the capital markets, uh, so you see the stock market going down while the bond market is going down, and that means most everything that people own practically are going down practically, because most people are in stocks and bonds, that kind of thing. The Fed's tradeoff is going to be very difficult right now; they have a very restrictive monetary policy plan. I judge that by the supply and the demand for credit. So the federal government is going to run large deficits, so that means they will have to sell debt; they'll sell Treasury bills and bonds. The Federal Reserve is planning to sell $1.1 trillion of debt also. Private investors are inclined—pension funds and so on—they're losing money while there's inflation, so they're losing buying power; they're selling, and there's a selling imbalance, and that selling imbalance means—because it has to balance with the buyers—that means a contraction in private credit, which means a recession. So as I look through this, we're in a tightening phase where it's beginning to bite, but it's not really—it's barely begun. Because the actual rises in short rates have barely begun, at the start of the other things are rising, and that tradeoff between growth and inflation is going to be very difficult, and that's why I believe that we've entered a period of stagflation quite like the 1970s. And then we can't look at it alone; we have to look at it in light of the two other big forces; in other words, the internal conflict force. We don't have enough money, and we don't have enough real money; we have plenty of fiat money because we could print it, but you don't have enough real money, and everybody says we need to spend money on this thing and that, and I don't even disagree with that when I look at the social conditions and the infrastructure, and I look at, okay, Ukraine, and do we need to be rebuild the Ukraine? Do we need to have greater military expenditures? Do we need to have these things? But we don't ask how much money do we have to spend. And so because of the nature of that—even just the costliness—we need to take care of the environment, but it's going to be expensive when we take care of the environment because we haven't yet fully developed the technologies that are fully cost-effective in order to do that. So I think that that's the mechanical description of where we are in a political environment. So as we have inflation, that's going to be a big political thing, and it's going to cause greater polarity. There's a risk that neither side accepts losing because of the populism, and you put more financial strain, and things get worse; conditions are likely to be significantly worse, for example, than they are now.
Just take a normal economic cycle where you are; it has the form together of what is money? I mean, it's genesis—what is money, and how can we not only digitalize it, which makes it to some extent efficient, but also the real questions: can it maintain value, so it will not be depreciated by central banks? That's a key thing. Can it be transferred, used all around the world, accepted for purchases and sales all around the world? Then it has to do with issues like: can it be private? There's a saying in gold's case, which is: it's the only financial asset that you can own that is private and you can move around that isn't dependent on somebody paying you money—paying you something. So as a medium of exchange, crypto, those in a fiat world, naturally becomes an alternative consideration. And the fact that it's gone on—something like Bitcoin, I guess, about 11 years—it hasn't been hacked, and it, you know, is working in that way, has its particular appeal. It has big issues; it's not a private asset; it is easily outlawed; it doesn't constitute a high enough percentage of wealth; it's—um, like right now, for example, Bitcoin's a small asset by comparison to a lot of things; like Microsoft is worth more than crypto is, and so it's not—it hasn't reached those uh, particular stages. I think that people are grappling for what the new money will be in this environment, and I think we don't know yet what the new money is. I think we're going to see different countries put out their different versions of digital currencies, and then there will be private assets, and gold will play a role. The important thing is we have entered an era which will carry us through the next number of years of what is the money that is widely accepted as a medium of exchange and a viable storehold of what. There were always people—they would come and go—but there were people who maybe were ahead of me who were kind and inspiring, you know, I would look at them and they might be a role model, and there were many, many such people, and it just kept going of encountering such people. There will be for you such people if you're open-minded to it.