Transcription
For about 55 years, I've been a global macro investor, and I learned that many of the things that surprised me never happened in my lifetime before. So, when I would see certain things happen that were like that, I would go back in history and study prior periods. Studying, for example, the Great Depression allowed us to anticipate the financial crisis in 2008.
Anyway, there are three big things that I observed happening that didn't happen in our lifetimes but happened during the 1930 to 45 period, and they are the creation of enormous amounts of debt and the printing of money to pay for those debts and it having its economic effects on inflation and growth. The second is internal conflicts over the largest wealth gaps we had since then—values gaps and the rise of populism of the right and the left. Those conflicts—again, largest since that 1930 to 45 period—and then the rise of a great power producing a great power's conflict internationally, with the rise of China as a great power challenging the United States with Russia. So, the great power conflict that also is the most—that that's happened since the Great Depression.
So, because those three things are happening now, and I didn't study them, I went back and I needed to study the cycles—what's happened over longer periods of time. So, I studied the last 500 years because these big cycles take about 75 years, give or take about 50—you know, like the rise and decline of the British Empire, the rise and decline of the debt—and that creates a path. Now, it's not just because they repeat in this way, but one can see the cause-effect relationships that are happening. So that has pretty much transpired according to script. We can get into those pieces, but I'd say those are the three main ones.
There were two others that had a big effect that I paid more attention to that I'll mention. One was acts of nature in the form of droughts, floods, and pandemics. They were very disruptive when they happened, killed more people and toppled more empires and or waters than others. And then also, of course, over a period of time, there's learning and producing new technologies that raises living standards. You know, it's raised per capita income, life expectancy, and so on. But those five factors transpire in ways that we've seen before to create this big cycle. If we can look at the cause-effect relationships, that's what I want to pass along because I'm 74 years old and I'm in a phase in my life that I want to pass along the things that are of value, and I think this is an important thing. But yes, it's transpiring according to script.
Is America going to be wiped out at some point soon? The dollar is held by countries in the form of debt. In other words, when you say I'm holding the dollar, you're holding a debt instrument. And we have a problem with the debt instrument—a few problems with it—holding the debt instruments. Those problems are that, first of all, as a result of what the United States was in the world—the largest trading country, the dominant empire, and so on—there's been a huge accumulation of dollar-denominated debt and dollars. Therefore, and there's also been a lot of deficits that had to be funded, which happens by selling dollar-denominated debt, which a lot of foreigners and banks and others bought. And so they have a lot of dollar-denominated debt. Now, if you're a creditor—meaning an owner of dollar-denominated debt—you need to have an interest rate that is high enough to more than compensate you for inflation. And so the production now of a lot more debt and them having a lot of debt and then also sanctions internationally, which means freezing dollar-denominated debt, all have created a reduction in the demand for dollar-denominated debt. There's also, you know, concerns in the world about some of the things that are going on in the United States, and that's reduced that. As a result of that, you're seeing more transactions take place in other currencies. And if they tra take place in other currencies, then others want to save in those other currencies because that's how they pay for it. So, if you want to save in what you pay for, you save more in it and less in dollars. And so that's the dynamic that is reducing the demand for dollars and dollar debt at the same time as the supply of it keeps coming because we have large deficits. So that there's a supply-demand issue. That supply-demand issue, by the way, also exists in European currencies. Okay. They have too much debt, and they're financed the same way, and Japanese currencies. And so what you're seeing is the movement—all that weight of money and debt—is causing prices to go up—inflation—and that's also being worsened by the supply chain deteriorations that are due to the international conflict. So, for example, in the case of, let's say, China and the United States and other countries, as they prepare for the possibility of war, they want to be self-sufficient, and so as a result, they work on being self-sufficient more than integrated and efficient, and so that dynamic is playing an important role too.
There's a business cycle or a short-term debt cycle, I call it, that, you know, sort of recession to recession, and the way it works is you have a recession and weak economy; central banks stimulate credit growth; credit gives you buying power; you go out and buy; the economy picks up; and then that continues until you start to have inflation. Then they tighten monetary policy, and then the economy weakens, and it goes into the next recession. Since 1945, when the new world order began—in other words, we had the currency and also the American world order beginning in that—we've had 12 of those cycles. They typically last about 7 years, give or take about three. We are now about halfway through this cycle in which they did the stimulation; inflation rises; they tighten monetary policy; and we're in the phase of the cycle where there's going to be then the cracks occurring and the negative impact on economic activity and the like, and it's going to be more difficult than normal because there's so much debt outstanding—you know, what we just talked about. So that is likely to happen over, let's say, the next year and a half.
And what we have is a situation where the second of those influences—the internal conflict influence—is bad. And you have a lot of populism. So, populists are people who will fight to win at all costs. They're not compromisers. You know, I will fight and I will win for you, and the rules be damned—you know, compromising be damned. So, you're going to have a political situation in terms of, you know, that kind of environment. It's a bad time for that. And then you have the international conflict. We are much closer to a conflict—a war of sorts—either a sanctions and economic war or even possibly a military war with China. And because of the politics also that that will be pushing its limits too, because the one thing that most Americans are united on—and both Democrats and Republicans are united on—is anti-China, and as a result, they all want a strong man on that, and so I think you're going to see pushing of the limits there, and that becomes a dangerous set of circumstances. So, I think that if we take the next, you know, let's call it one, two, three years, I think that those are going to be riskier years. If you're in a war, what you want is the commander and everybody follow the instructions and just do what you're told. And you know, it's not like we're going to sit there and argue, debate, and so on. So what you see is the breakdowns. And particularly you see the breakdowns also when they're at odds—there's a lot more to argue about—like now the populace of the left and the populace of the right. And so in the 1930s, you saw four democracies become dictatorships—choose to become dictatorships. They had parliaments that chose to become dictatorships. Germany, Italy, Spain, and Japan chose that because in order to fight, that's what you need. You know, by and large, I didn't anticipate that we were going to have the war with Russia, but I did anticipate that we were likely headed in a warlike environment. It's very much fell as expected there. The economic and the financial very much is the same. So, by and large—almost exactly—it's transpired the way described, but yes, it's unfortunately going according to script. That doesn't mean it's destined, but it's difficult to take off track. Each stage is the logical consequence of the stage that preceded it.
So, let's take the existing situation. The United States has a lot of debt, and it has deficits. So, it has to sell debt, and others are holding debt. And if you say how do you get healthy, you have to spend less than you earn, to not borrow money and get financially strong. That's difficult, and particularly when you have a lot of debt, 'cause you have to take a portion of your income, and you have to pay the debt, and also you're living in spending more than you're earning, and so how do you rectify that? What—cut spending? I mean, it's very difficult to cut spending or raise income—that's not easy. So, we're living in a world now where policymakers don't think how much money do I have to spend and what should I prioritize it on; they think how much money do I need to spend without regard to how much they have, and then they go spend it, and then they have deficits that central banks can print. It's just like the same as individuals. They have the deficit, but in their case, they have the capacity to print the money to pay the deficit. So, it's not easy to fix the financial problem, the internal problem. You know what it's like? Can you get people to come together to—you say there's a common problem—let's have the left and the right and people—very difficult. People have big differences in values and conditions. And so it's very difficult to bring them together to deal with the problems. And the same is true internationally. You know, easier said than done. So, given that dynamic, there is then the stages, and so it's pretty clear normally what comes next.
I think of savings in tiers. The first tier is to secure your well-being—to own a portfolio of assets that are going to secure your well-being. And then after you have that taken care of, then you can go to the next level—take more risk and so on. That well-being—that purchasing power—has to be viewed in terms of inflation-adjusted dollars. You know, if you're holding a debt instrument and you know a cash-paying instrument and it gives you a 2% interest and you have a 5 or 6% inflation, you lose money at 3% a year. So, you have to look at that in real dollars, and you have to hold that portfolio in a way that is balanced to any kind of economic environment. And then the way I do it—and I remember, you know, I didn't have anything, and then I start to acquire money, and I start to think, okay, how much—how many weeks do I have, months do I have, or years that I'm financially safe, and what do I hold it in—and then, you know, once you got that taken care of, you can go beyond it—and I wanted it in a very well-balanced portfolio—type of portfolio that does equally well no matter—matter what happens. There are basically two big influences on markets: the growth rate and the inflation rate. Like if you know that growth is going to be faster than expected and inflation is going to be higher than expected, you know that bonds are going to go down, and vice versa. I give that as an example. So, the way I look at it is there are those two big influences—four environments—and each one of them can go up or down. So, there are four quadrants that I think of: rising growth, falling growth, rising inflation, and falling inflation. And I want to have a portfolio that will be 25% of my risk in each one of those so that I don't have any bias. And so I pick the assets that are going to do well in each of those four quadrants, and I hold them in a balanced way, and I've tested that, you know, going back actually to 1900 and so on, and you'll actually increase your buying power—you know, that's the kind of thing that I think in the beginning—then you have to also make provision for, you know, taxes to some extent. So, I say whatever that amount of money is, I want twice as that. So, in case it goes in half, and I want to build a portfolio that looks like that for, you know, I don't know, x number of years that I have that, and that's the safe savings, and then when I go beyond that, then I'll take more risk. But I think that being safe, particularly in this kind of an environment, is important. And I would take a perspective of how to do that that's like the one I'm just describing.
So there's these four quadrants—growth and inflation. If growth is less than expected and inflation's less than expected, you would like to own bonds. If it's higher than expected, you would not want to own bonds. If inflation is higher than expected, you would want to own assets such as commodities and gold and inflation-index bonds. If growth is faster than expected, particularly if inflation is less than expected, you'd want to own stocks. So you get the idea.
The wealth gap is very much due to a self-reinforcing cycle in which if you earn a lot of money, you can afford to take care of your kids' education. You can raise them in a better way. If you don't earn a lot of money, you don't have that privilege. So, all through history, during those such times, wealth gaps have increased. So, you look at the cycles—you have a new, you know, like a new world order—like in the 1850s, you have the civil war, and then you have that, and then you have new technologies and inventing. You have the industrial revolution take place, and things go great. But what it does is it also increases the wealth gap. Some people make a lot of money; others don't. And it also increases the level of indebtedness. And you make the turn of the century, then you see big conflicts over wealth. You have the panic of 1907. And so what you see is the industrial revolution turns into what's called the Gilded Age in which there are very rich—decadent—while there's poverty in, you know, in the early turn of the century—people are living very, very lavishly, very decadently, at the same time as there—you know, sweatshops and all of that. And then there's kind of a revolutionary reaction to that. So, these things happen over and over again for the same reasons.
I think the main thing with China right now is, um, you know, we're on the brink of war with China for various reasons—you know, like I hope we make it to 2050. Yeah. The demographics is as I describe it. And by the way, them losing doesn't make us winning—just so we're looking at that. We hope everyone gets better, and the world economy—we hope everybody has a better way. Everybody loses in wars. That's their set of circumstances, and it'll be what it'll be. I think the most important thing is how do we deal with our circumstances—you know, how do we become strong and healthy—financially healthy, productivity healthy, and so on. Yeah. That we could talk about the demographic problem in China, which is just what we talked about before in terms of, you know, does robotics and productivity and all that make up for that? I don't know. But I really think we're projecting too much on the outside world. Okay. What do we do with China? Of what relevance? Well, we trade with China. We don't have to go to a military war with China; we shouldn't do that. And then if that's the case, you know, what's the problem with them growing? It's not very much—you know, okay, let them grow and invent, and let us grow and invent and share the inventions. That would be good. But the problems that we're facing are pretty much our own problems—the things we're talking about—and the breakdown of infrastructure and, you know, all of that. So, really, I think we should focus on that. You know, maybe their demographics is a big burden or not. You know, they have other big burdens too. We all do. But let's focus on how we can be as good as we can be.
The big issue is that a lot of debt was created. A lot of it is government debt, but it is also corporate—to a lesser extent—household debt. So, if you look at the Silicon Valley Bank issue, it's not so much their issue as much as a worldwide issue. And what happened is that, you know, what's a bank? A bank takes in deposits, and then it takes that money and it invests it in things. And so they bought a lot of government bonds that had a higher yield than they were paying out in the deposits—there's a tightness of monetary policy, and those yields went up, and the bonds went down in value, and then the amount they have to pay out went up in value, and so they went broke, and um, that is happening all over—that happens not only through banks—banks as a whole did a lot of that—but insurance companies and so on all around the world—same sort of thing happened in Europe; same sort of thing happened with Japanese companies—is even buying US dollar bonds a lot. And if you were to mark those to market, you would have a terrible calamity. But what's going to likely happen is they don't want any more of those bonds, and we're going to have to sell more bonds because we're going to have a deficit. So, when you have a deficit, you have to pay for it through selling debt, and there's a lesser demand for that debt. I think that that creates, you know, a problem in which either interest rates go up or the Federal Reserve's got to come in and print. And this is a problem that exists also in Europe with the European Central Bank, the Bank of Japan—all of them. So, that's where we are, and it has knock-on effects. It's like dominoes that fall. So, it will produce less credit, and as it produces less credit, that'll produce less spending. It'll come in certain parts of the economy—for example, commercial real estate—for example, venture capital and private equity—for example, low-grade bonds where they're heavily indebted companies, and the interest rate goes up a lot, and that causes problems. So, I think you're in the part of the cycle where you've had the tightening, and the dominoes are beginning to fall, and I think that that's going to produce more problems. So, I think when it comes down to it, there's just too much debt, and we're adding it to it too quickly. And so it's going to—either that debt will be paid off with hard money, in which case there's not much printing and so on—or it'll be paid off with printing a lot of money to make it easier to pay off. I think in the end, it's always the case that they print a lot of money and and make it easier to pay off, but you have the reduced value of money. So, that's how it looks to me. You'll have probably a stagflation environment, and because you have that dynamic going on at the same time as you have supply chain disruptions because of the geopolitical, I think it's going to be a difficult environment.
Go to places or spend time where there's not as much of this junk going on. You know, I mean, first of all, I think recognize—let's go to some of the basics. What do you really need? You need a bed to sleep in, any food to eat. Most depressions—most people remain employed. Most wars—most people don't get die or get injured. You know, let's calm down and put all this in place. Let's be in places where there's, you know, goodness and harmony and beauty. You know, maybe spend more time in nature, or you know, you go out there and don't get all stressed about it. You know, navigate it well. Enjoy life, enjoy those things. And I think that's most important. I want to emphasize the importance of also the softer skills—the ability to touch people when they're going through a difficult time, to be able to express your caring. And it could be helpful advice, or it could just be putting a hand on their shoulder or sending them signs of your caring when they went through a difficult time. I know that I've experienced this. I know that, for example, when I lost my son, the kindnesses of different people made a world of difference in my experience, and I will ever forever appreciate that, and I know that in helping others through those types of experiences, whatever they may be, is a great power. Love is a great power. Love is more powerful than just about anything. So, those soft skills are important skills.