What We’re Reading (Week Ending 04 September 2022) - 04 Sep 2022
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 04 September 2022):
1. David Senra – Passion & Pain – Patrick O’Shaughnessy and David Senra
[00:27:10] Patrick: What about the people underneath these leaders? I probably listened to 50 episodes or something of founders. If I had to summarize one of the interesting lessons, is the dramatic importance of the individual. Which I think runs a little counter to maybe how a lot of people wish the world was, where if it was more communal and Steve Jobs was going to emerge if Steve Jobs particularly wasn’t him, or I think the great individual theory or thesis, a lot of people don’t like. But as I listen to a lot of your episodes and these stories, it strikes me that the person matters a lot. And I’m curious what you’ve learned about the layer of leadership underneath the founders, and if there’s any common stories, themes, traits that you’ve sussed out there.
[00:27:57] David: I want to start with a quote, because you just nailed it. And I’m a Edwin Land fanboy. I am on a mission, because I meet a ton of smart people who don’t even know who he is. So maybe people listening just don’t know it, that he was Steve Jobs before Steve Jobs. Steve Jobs met him when he was in his 20s, Edwin was 70 years old. And Steve came over from the meeting saying, meeting Edwin Land was like visiting a shrine.” These ideas that you’ve undoubtedly heard from Steve Jobs, did not originate with him. He literally took them from Edwin Land. The idea of building a technology company at the intersection of technology and liberal arts. That’s not Steve. That was on every single presentation that he made on Apple. He got that idea from Edwin Land. He literally talked about him over and over again. He said, “This is my hero.”
And Steve also had this deep historical knowledge, which all these founders definitely have, all of them. I have not come across a founder that was not curious about what the great people before them did. I actually made a 30 minute, in between episode. It’s called Steve Jobs and His Heroes. And I break down 39 podcasts on either Steve Jobs or the people that he talked about influencing him. Even when he was young, he was in his 20’s, and he could tell you how he felt the invention of the Macintosh was similar to Alexander Graham Bell’s invention of the telephone. It’s like, how the hell do you know that at that age? That’s remarkable. But Edwin said that there’s no such thing as group originality or group creativity. He goes, “I do believe wholeheartedly in the individual capacity for greatness.” And he says, “Originality are attributes of a single mind, not a group.”
What happens is, even if you have a bunch of co-founders, there’s usually one. A lot of these people had co-founders. You could say one A, one B, whatever the case is, but it’s always singular. It’s never a joint thing. And what’s good is, they find people that can play the role of the second or third. It’s not like, “Hey, I want to be the smartest person in a company.” They all obsess. This is in Warren buffet, David Ogilvy, Enzo Ferrari, Steve Jobs. They only surround themselves with A players. There’s a great book called In the Company of Giants. It’s on the floor next to me right now. What’s fascinating about that is, it’s two Stanford MBA students in 1997, go and interview all these technology founders. If you think about the growth of technology industry from ’97 until now, they were clearly ahead of time.
And what’s fascinating is, Steve Jobs, young Steve Jobs, he just came back to Apple, sits for the interview. They start the interview. They’re like, “Hey, startup founder doesn’t have that much time to recruit.” And I forgot the exact terminology, but he cuts off. He’s like, “I disagree completely.” Recruiting talent is the most important job as a founder. Think about the first 10 people in your company. Every individual is 10% of the company. You don’t transition from a startup, a nascent idea, to a super successful company that creates a great product, if you fuck up that part. That was his point that he was making there. And he knows that because, this is the crazy thing. So you mentioned Mike Moritz earlier, Mike Moritz wrote this fantastic book, the little kingdom. I read the updated version called the Return to the Little Kingdom. And what’s fascinating about that is, that’s way before Mike was an investor.
It’s the first, I think six years of the history of Apple. And when the book ends, the Apple 2’s doing really well. Steve Jobs is still at the company, but we don’t know how the story’s going to end. So then I would read that book, and then what you need to jump into right after that, there’s another book called Steve Jobs and the Next Big Thing. I think it was written by Randall Strauss. That book is about the 13 years between, he left Apple and then he returned. I call it bizzaro Steve Jobs, because it’s a gifted, intelligent entrepreneur, making every wrong decision in the book. That book ends in ’97, he gives this interview. Think about this, how crazy this is. He starts NeXT. One of his first 10 hires at NeXT is an interior designer for the office. What the hell is happening here?
You’re reading that book and you’re like, “I know Steve Jobs is smart. I know he is talented. How the hell did he do this?” We talked a little bit about ego before we started recording, where it’s very prone to let your ego get the best of you. People admire you because the work. What happens is, you usually isolate yourself. You’ll work really hard. You’ll do a lot of work. That work draws the attention of other people because it adds value to their life. And then suddenly, over time, you confuse us. It’s like, “Oh, they don’t like the work. They like me. And then I could just show up without having to do the work and everything will be fine.” And at NeXT, he just showed up. He’s like, “I’m Steve Jobs.
[00:31:51] Patrick: Ego’s such an interesting one. That lesson is fascinating. Confusing people liking the work for liking you. I’ve never heard it phrased that way. And that is so damn interesting. Where else do you see ego rear its head, good or bad? It strikes me that ego’s a negative connotation. You don’t want to have an ego, but you do want to be confident. You do want to be charismatic. You do want to be a good salesperson, some of the things that high ego people might be good at. What other things have you learned about ego? That phrasing is so helpful.
[00:32:21] David: I actually don’t think that you build a great company with a giant ego. I don’t think that exists. Sam Walton has a good idea about that. He’s like, “Listen, your ego should use to drive you, but you should not be on public display.” And he’s like, “I hire people at Walmart with big egos, that know how to hide it, because there is some weird thing where it drives you.” What’s the problem is, when you make it apparent that you think that you’re better than everybody else. In almost every story, you have a young entrepreneur that needs some help. They’re usually helped by people that are older, have a lot more access to resources. So think about how people are funding private companies now. You have super smart and determined founders, a lot of potential. Who knows what a person like that is going to be in 10 or 20 years, but they need assistance.
Whether it’s they need resources, they need personnel, they need money. What I realized this morning is, there’s this guy named Thomas Mellon and Thomas Mellon is one of the most important people in American business history, because he’s the patriarch of the Mellon Family Dynasty. What he did is, he made a lot of money before and after the American Civil War. He’s maybe 50 years old, super rich, owns a bunch of banks and stuff like that. He comes across a 21 year old Henry Clay Frick. Henry Clay Frick shows a lot of potential at this time. What Mellon can’t possibly know yet, 40 years in the future, Frick is going to be considered one of the best entrepreneurs to ever do it. So much so that Andrew Carnegie sees him and is like, “I need this guy on my team.” And then they have a falling out. There’s a fantastic book called Meet You in Hell.
I recommend everybody reads if you want to learn about Andrew Carnegie and Frick. It’s about what Frick told him. They had a falling out. Later, when Andrew’s about to die, he sends a letter to Frick. It’s like, “Hey, let’s reconcile. We’re living in the same city. We live a few blocks away. Let’s get together.” And he writes back. He’s like, “I’ll meet you in hell.” What was fascinating is, Mellon sees Frick. Frick is at the very beginning of building this Coke empire, that’s eventually going to be acquired by Carnegie’s company. And Mellon sees him. He’s like, “Oh, this is another me. This is me when I was younger.” He approves the loan. Then Frick takes that money, immediately deploys it, starts scaling up because he’s like, “Hey, I got an opportunity. I need to do this as fast as possible.” Goes back to Mellon, I think he borrowed $1000, this is in 1800.
So it’s a lot more money than $100 today. So he borrowed $100, goes back almost immediately, says, “Give me $10,000.” Mellon’s like, “Yo, what the hell are you doing kid?” So he sends one of his partners. He says, “Go check out this Frick guy. He seems to have potential to me, but I need to make sure this guy’s not full of crap.” So Mellon’s partner goes and shadows Frick, and he writes back to Mellon and he’s like, “The guy works in the Coke plants all day long. Studies his books at night, knows his business down to the ground.” Make the loan. And that is the first hand up that he gets, that causes him to build a monopoly in his industry. There was no one B to Frick’s Coke empire. It was clearly him. What was fascinating is, I didn’t put this together the first time I read that book, because I probably read 150 books, 150 biography since I read it the first time.
But I had just recently been rereading books on John D Rockefeller. And this guy named Jay Gold pops up in Rockefeller’s biography, every single one, which is really weird. Everybody’s read Titan, the most famous biography of johnny Rockefeller. What I did is, I went in the bibliography of Titan, found a book that the author, Ron Chernow, used as research and ordered it. It’s a very old book. It’s 40 something years old. It’s very hard to find. I read that book and I’m like, “Wait, this is a biography of Rockefeller, and this is an entire chapter is based on Jay Gold. What the hell is happening here?” And then you see when people would ask, and Rockefeller is probably the most famous entrepreneur in history. And they asked him, “Who’s the best businessman you know?” And he said, without hesitation, “Jay Gold.” Without hesitation. Then you have Cornelius Vanderbilt. This is another thing we should talk about, is how all these people wind up knowing each other.
There is something to be talking to other A players, and then you have cornea Vanderbilt who’s the richest person in America at the time. 40 or 50 years older than Jay Gold. And he’s like, “Jay, Gold’s the smartest person in America.” So I was like, “Okay, what the hell happened?” So the author actually sent me the book, a biography of Jay Gold, came in 15 years ago and I think it’s called Dark Genius of Wall Street or something like that. These are formidable people saying, “This is the one.” You got to pay attention to that. Why is that happening? So I’m reading Jay Gold’s biography, same situation. He’s 20 years old, 21, needs a leg up, meets this older, more successful businessman. But where Mellon did is I’m successful, but he didn’t know his ego get in the way. He’s like, “I want to be this guy’s partner. His success does not threaten me at all.”
The difference between Jay Gold’s life is, Jay Gold winds up taking on an older partner, this guy named Zadock Pratt, I think is his name. I’m going off memory here. So I might get his name wrong. But that guy was super rich, owned a ton of land in the Northeast at the time, owned 30 different factories that would produce leather goods. And all the different factories would have different partners. So he winds up doing a partnership. Jay winds up doing some surveying work for him on some of his land. And Zadock’s like, “Oh, this guy’s smart. I’ll partner with him. I’ll put up the money. I’ll give you the expertise. And then you run with it.” Well, Jay Gold is a straight up genius, way smarter than Ill ever be. And he runs with it. He’ll hit you up for advice and money, but eventually he’s like, “Oh, I got this. I can figure it out.”
He’s coming up with ideas. The crazy thing about Jay is, this guy’s been in the leather business for 40 years. I’m coming up with ideas that he doesn’t see. That threatens Zadock’s ego. How do I know it’s Zadock’s ego? Because the guy was so rich, he started his own bank, printed his own currency. Guess whose face he put on his currency? His face. You know Mount Rushmore, in this town is a big granite wall or a big rock formation. So Mount Rushmore, you got all the presidents on there. He hired somebody to carve his own face. Think about how egotistical you have to be. I want people to come through my town and see my giant head hovering above everybody. They started partnering. He didn’t like that Jay stopped asking him for advice. He thought his success and Jay was managing his leather factory, they call him tanneries, better than his other partners.
He didn’t like that. He felt threatened. So he tried to maneuver and he said, “Hey, we’re going to end the partnership. You have to either buy me out for $60,000, which is the money I put in. Or I buy you out for $10,000, which is the money you put in. “He did that because he’s like, “This guy doesn’t have $60,000.” Didn’t know that Jay has a brain. He knew this was coming and he had secretly set up financing and he was waiting for that to happen. Rockefeller is the exact same story, for his first partners in the oil industry. He had older partners who to try to screw them, and he says a great line. He’s like, “While they were talking so loud, my mind was running.” What happens is, “Okay, I’m hitting this provision in our contract. You have to come up with $60,00.”. Jay’s like, “Here it is.” And he takes off running. You had the opportunity to partner with one of the greatest entrepreneurs to ever do it, and you fumbled it because of ego…
…[00:58:38] Patrick: It reminds me of a conversation I had with Tony Xu who started DoorDash. Tony’s a very mild mannered, very humble, almost quiet person, which is why this quote from him stands out in my memory so strongly, which is I asked him something about culture. How do you think about constructing the culture of a company? His answer is basically, “I think a culture of a company should be like 80 or 90% just the personality of the founder. That’s it. It should be the extreme characteristics of the personality of the founder. Because if you try to make it generic, nothing stands out and there’s no progress and there’s your dominates.” I think that’s basically what you’re saying. These stories are fundamentally the stories of individuals replicating themselves in some interesting way like you mentioned with Jobs. And the marketing thing is such an interesting angle that I don’t think you and I have ever really talked about. Because so much of the time we think about the products and that’s mostly what we’ve talked about, the phone, the Polaroid, the airplane, the whatever, and we don’t think about as much the story and the marketing. What have you learned about all of these people as it relates to marketing? Did they all tend to be good at it? Was it just a means to an end for them? What have you learned about how these people distributed or got the word out about their products over time?
[00:59:48] David: I’m a collector of maxims and aphorisms. I think my favorite one might be actions express priority. I don’t look at what you say. Just look at what you do. They’re marketing geniuses, all of them. What do you call a person that’s gifted at customer acquisition or distribution? A founder. There’s a ton of people that have great products and no one knows about, so you’ve failed that aspect of it. I’ve read a book called Insanely Simple which is written by one of the guys that worked at the ad agency that Apple used. He compares and contrast in the book Dell’s approach to marketing when he worked for them and Apple’s.
He’s like, Steve told you with his actions that marketing was important. How do he do that? Every Wednesday we had a three hour meeting. This is maybe post-iPod and before iPhone. Somewhere in there. But after, they were already having a lot more success, when he came back. He goes, we had a three hour meeting and Steve would review every single marketing ad. Every single thing. There was not a fucking billboard that was going to go up until Steve said that was okay. The reason it is important is because there’s a lot of people that preach in their companies, “Marketing’s important and it just works.” Steve showed with his actions.
Then you have Enzo Ferrari’s just on top of mind because I read three biographies of him and I just read all of my highlights again yesterday. But he was a marketing genius too, because he’s winning Le Mans. That’s how he jumpstarted his company. And because of Ferrari stands for victory, you have all these rich Americans flying to Italy and they’d want to meet Enzo Ferrari.
Ferrari is very mysterious. He wouldn’t let you see his eyes. He’d wear sunglasses in every meeting. He did that on purpose. He thought they were like the windows of the soul and he didn’t want you reading his soul. What he’d do is his employees would catch him giving a tour of this rich guy. The guy’s like, “Oh, my God, Enzo, these cars are fantastic. I must have one.” He goes, “I appreciate that. I’ll see what I can do. I might be able to get you one maybe six months, maybe 12 months from now.” Then the guy would leave and the employee would go up and be like, “Enzo, we have a parking lot full of unsold Ferraris.” He’s like, “A Ferrari has to be desired.” He knew it. It’s very similar to that fantastic podcast you just did with Rolex, with Ben Clymer. You see that same idea with a purposely limit production or don’t even tell you how much they’re making. There is a secrecy element to it.
Edwin Land, same thing. When we think of how much Steve Jobs would practice for his presentations, he got that from Edwin Land. Edwin Land would do all kinds of crazy stuff. Way before he invented a camera, he invented polarization. So one of his main inventions was when you were driving at night, you would be blinded by the oncoming headlights of the other car. So he has that film they put over it. He was trying to sell it to a bunch of other car companies. There’s a story in one of his biographies where he rents a hotel room. He figures out where the sun is going to be at what specific time, which hotel room that he needs to get that has a window that faces it. He puts a fishbowl there and then he invites the people he was trying to sell. Then at the perfect time, it shows the light emanating through the windows with the fishbowl, with and without the polarization. That’s how he sold them. It’s that thought process.
Walt Disney, fantastic, fantastic book. Enzo Ferrari and Walt Disney have one thing in common. Both their first companies went bankrupt. That’s a lot people don’t know. Walt Disney, everybody’s like, “Oh, one of the best founders ever.” How could he not be, right? Everybody thinks he was a cartoonist. Yes, he invented animation, first successful full-length animation movie. But if you ask, “Well, Disney, what is he most proud of?” He’s most proud of two things. One, starting his company and keeping control of it, because he lost control of his first company. And two, Disneyland. He did not mention animation. When he was dying. He’s in the hospital dying, his brother is his partner, Roy. They’re looking on the ceiling-
He’s in the hospital, dying. His brother is his partner, Roy. They’re looking at the ceiling of his hospital room and they’re going over the plans for EPCOT. He never got to see it, because he was dying. This is very common. Coco Chanel? It’s a thing. They work to the day they die. Enzo Ferrari? Day they die. There’s no retirement. There’s not going to be a retirement for James Dyson. There wasn’t a retirement for Steve Jobs.
What Walt Disney was gifted at is also the amusement park. It’s like, “Hey, why are you making an amusement park?” What people don’t understand is that back then, amusement parks were seen as lowlife stuff. They were dirty, full of scam artists, more like a circus kind of thing. Walt Disney said something that was genius. They’re like, “Why are you building an amusement park? They’re dirty, low-class places.” He goes, “Exactly. Mine won’t be.” The way I frame that in my mind is, “Their mediocrity is my opportunity. There is not a great amusement park. I will be the first.”
He’s like, “Okay, I need to raise money to fund Disneyland.” He borrowed against his house, borrowed against his life insurance. He was crazy. He didn’t give a shit about money. He should have been way more wealthier than he was. He packaged the financing and the marketing together. He’s like, “ABC, I’ll do this weekly show. I’ll be the one hosting it.” The founder is the guardian of the company’s soul. They would show some things from his animation, but then they would also show, “Hey, this is what we’re doing in the park,” essentially like a weekly ad that people were watching willingly.
As a result, he gets money from that. He gets perfect marketing and advertising for that, maybe the best ever, and ABC puts up a large percentage of the money needed to make the park. What happens? As a result of people watching this … it was one of the highest-rated shows on television for a year … the day he opens the park, it’s the biggest traffic jam in Orange County history. It’s not just, “I’m going to make the very best product.” He considered the amusement park like a cast. It’s just a physical movie. “I’m building a physical movie, so I’m going to make the very best amusement park ever, and it’s going to have the very best marketing.”
[01:04:38] Patrick: It sounds like a common theme in all these stories, is process as art by revealing the process behind the product, because they’re so obsessed with that. That is a common marketing story. Is that right? Do you see that over and over?
[01:04:49] David: I read Warren Buffett’s shareholder letters. To me it’s like how many people have studied more founders and more businesses than Warren? He says in there, “David Ogilvy is a genius.” I’m like, “Who’s David Ogilvy?” This is years ago. I find David Ogilvy, and he’s now one of my personal heroes. I read five books on him. What did he do? He did exactly what every single other entrepreneur did. Figured out what was the best shit that happened before I was alive. “Hey, those are good ideas. Human nature doesn’t change. Let’s use them.”
David Ogilvy winds up, in the very last chapter of Ogilvy on Advertising, he talks about the six people, the six advertising giants that came before him, that he studied, that if they were alive, he’d befriend. That’s another thing Bill Gurley’s talked about that’s important, is going out and actually meeting these people if you can. Then he would just take all these ideas and build on it. His point was there’s no such thing as a business that is boring. It’s only boring advertising. He says, “Listen, it’s boring to you because you do it every day. If you explain to the customer the process, they’ll find it interesting.”
He did this for explaining the brewery process for one of the beer accounts he had. The person that owned the beer company was like, “I don’t want to do this. Every other brewery does it this way too.” He goes, “Yeah, but we’re the only one telling the story.” He spends three weeks … or three months, can’t remember … researching the hell out of Rolls-Royce, talking to the engineers, reading all the material. He winds up reading a 50-page document. There’s one line in it that says, “The loudest thing in the car at 50 miles an hour was the clock inside.” He used that as a tagline, and then put a couple thousand words of copy.
Walt Disney too. Maybe the best, if you want to call it a media company. I can’t think of another company that has the assets that Disney has. It started with a huge fight with Roy Disney, who is the brother, the business aspect of that, and Walt Disney. They were having this fight in one of their books where it was just like, “How much is this going to cost?” Walt says, “We’re innovating. I’ll tell you when I’m done.”
To go into the process behind it, that book, Disneyland, goes into it. To your point, it’s almost like opening the kimono. He shared, with the entire country, all the work and effort and detail that went into it. I shopped at Trader Joe’s for a long time. It’s a weird place. Interesting. I liked it. Okay. Reading the biography of the guy that started it, you have to understand why they’re doing what they’re doing.
The example I would use is one I talk about sometimes on the podcast, because people are like, “It sounds like you have really good recall or you can remember this stuff. You must have a really good memory.” Absolutely not. The way I make the podcast, I read a book, make the highlight. That’s the first time I read the highlight. The book is done. The night before I record … I usually record in the morning … the night before, I’ll reread all the highlights. That’s the second time I’ve read the highlights now. I record the podcast. That is the third time I’ve read the highlights. I edit the podcast. That is the fourth time I’ve heard the highlights. Then the fifth time is I have to take pictures with the Readwise app and literally input them physically, one by one. It usually take hours to do this. That’s the fifth time.
People knowing that, when they feel comfortable pressing Play when they listen to Founders … because like, “first of all, this dude, every single episode, he’s got to read an entire book to prepare. That’s kind of crazy. Then second of all, he’s not just reading it casually, doing it once. He’s read these words five times,” and then I’ll reference them in future episodes. The only reason I’m able to reference them in future episodes is because I did that five times.
If there’s any part of your product that seems banal or ordinary to you, I promise you, no one is thinking about your business as much as you. The favorite business of mine in the world, you think about it less than probably five minutes a week. Nobody is thinking about it. You have shit in your brain that is interesting to customers, and then you could package that up and use that as marketing to get more customers.
2. ‘Gama- Gaeru’: The Most Celebrated Ceramic Toad in Stock Market History – O-Tone
This little post will neatly encapsulate the popular delusions and sheer madness of crowds brought forth by the Japanese stock market bubble of the late 1980’s.
The genesis of this story? The fourth floor of an awfully exclusive “Ryotei” restaurant in Osaka, which accommodated, prominently positioned, an ugly ceramic toad.
Within Osaka, the toad is known as “Gama-Gaeru” or “toad-frog” and is regarded as a minor deity, which possesses a good luck charm and has the power to attract wealth to its owner.
The restaurant was owned by Nui Onoue, a grandmotherly lady in her 60’s. She was a fervent disciple of bizarre rituals and her toad was one of a kind: An amphibian Warren Buffett. It was incredibly successful in its role as a money magnet. At the peak of the Japanese stock market bubble, the toad would control a 20bn US Dollar stock portfolio, make Mrs. Onoue the largest individual shareholder in three of the world’s biggest companies and the wealthiest woman in Japan…
…As word about Mrs. Onoue’s Midas touch spread, she was also visited by senior executives from the most prominent Japanese investment banks in the late 1980’s. According to the author Alex Kerr, by 1991 the Industrial Bank of Japan (IBJ) alone had passed Y240bn over to her, and 29 other banks and financial institutions had advanced her the staggering sum of Y2,800bn for her spiritual endeavor.
Unfortunately, the toad lost its divine touch shortly after. At the beginning of 1990, the biggest stock market boom in modern history had come to a grinding halt and was slowly morphing into a giant crash.
As Mrs. Onoue’s portfolio collapsed in synchrony with the Nikkei 225, she was forced to borrow massively to cover losses and to back loans. She would leave the spiritual path to riches and start a criminal career forging deposit documents. Helped by a branch manager of a small Osaka credit association she faked certificates worth a Y460 billion, almost as much as the entire deposit base held by the tiny bank, in order to obtain loans from other banks and non-bank financiers worth a 172 billion Yen.
Slowly, the public started to question how on earth a restaurant owner was able to amass such a fortune, and leading banks handing over to her ungodly amounts of money. Doubts were also raised about whose voice she was really listening to before she made her investment decisions.
Although in the past “Gama- Gaeru” got all the credit, more and more it dawned on the public that maybe her sugar daddy, and later a senior executive from Yamaichi Securities, a broker house that was already up to its neck involved in scandals surrounding stock loss compensation and Yakuza connections, had also been whispering into Mrs. Onoue’s ear.
Mrs. Onoue was arrested in 1991 and eventually sentenced to 12 years in jail in 1998 for involvement in Japan’s largest loan fraud. But there was further collateral damage. The most infamous being the chairman of the International Bank of Japan, the predominant man of the Japanese business elite. He was forced to resign in shame because of his strong ties with Mrs. Onoue.
3. TIP370: Inflation Masterclass w/ Cullen Roche – Stig Brodersen and Cullen Roche
Cullen Roche (00:02:46):
And I’ll tell you why I don’t find this to be a terribly useful definition. Because in the type of monetary system that we have, we actually experience the growth of the quantity of money over any sustained period of time due to, mainly, because of economic growth. And so, people have this view that money necessarily causes inflation. And this is old-school monetarist thinking or some Austrian School thinking that leads people to believe that the more money you create, the more inflation we’ll have and the worse off we’ll be.
Cullen Roche (00:03:22):
And the reality is that the way that the modern monetary system works is that most of the money supply is in existence, basically, because money in today’s economy is mostly deposits. And deposits come into existence through the lending process. And so, what ends up happening is from an accounting perspective, money is just a really simple credit agreement. It is both an asset for the lender and liability for the borrower. And that, in and of itself, is never necessarily a good or a bad thing.
Cullen Roche (00:03:58):
People like to talk about the liability side of balance sheets but they often neglect that there’s an asset side of a balance sheet. And so, from a deposit creation perspective, when a bank makes a loan and that has become the dominant form of money in the modern monetary system, the deposit is an asset for the borrower and liability for the bank. And so, from a pure just balance sheet perspective, from an accounting perspective, when a loan is made, no one is necessarily better or worse off and it depends on all sorts of other factors.
Cullen Roche (00:04:32):
And the fact that the money supply increases because of this, it really doesn’t tell you much about anything. It just tells you that balance sheets have expanded. And over the course of very long periods of economic growth, we actually want balance sheets to expand. And so, even though people like to focus on the liability aspect of this, the reality is that the asset aspect is just as important. And whether or not that has a positive or negative impact on the economy, in the long run, depends on all sorts of different variables.
Cullen Roche (00:05:04):
I mean, to cherry-pick an example, for instance, I mean, if somebody borrows a million dollars and creates some world-changing invention that makes all of our lives fantastically better, well, yeah, technically, there’s a million dollars more of money that is in supply. But this invention, whatever it may be, will dramatically improve our living standards across time. And so, it’s a lot more complex than money and the sheer quantity of it.
Cullen Roche (00:05:35):
And I think that a lot of people have a tendency to fall into a political bias with a lot of these conversations, where you think of the government primarily as being a money creator. And the reality is that most of the money today is created in, really, a fairly market-based type of system where it’s almost a meritocracy in terms of who can borrow and who cannot. And the banks are mostly assessing your lending capabilities, your borrowing capacity based on, really, how valuable they think those loans might end up being, or what the collateral is that exists.
Cullen Roche (00:06:11):
And so, it’s a really complex issue. And narrowing it down to purely the money supply just doesn’t tell you anything because, frankly, the money supply pretty much always increases over any long period of time…
…Cullen Roche (00:19:12):
I mean, the ’70s were really more so an oil crisis than anything else. But I don’t think we’re in an environment where we’re likely to see very high sustained to say 10% inflation or something like that just because I think that the secular headwinds are… they’re so big. They’re so much different this time around where you have not necessarily a Japanese type of demographic issue in the developed world, but it’s much more similar to Japan than it is, say, like a baby boom situation or something like that, where the population is growing pretty significantly, meaningfully.
Cullen Roche (00:19:47):
But in addition, you have all these other factors like the technological factor, the globalization factor is one of the biggest. I mean, you could argue that the world has never had so much accessible, cheap labor in its existence. And so, globalization puts a huge secular downward trend on inflation. And so, a lot of these big macro trends, I think, they don’t necessarily put a ceiling on inflation, but they make it very, very difficult especially for policymakers to create a lot of inflation.
Cullen Roche (00:20:18):
And I think that the thing that is most interesting about the last 18 months is that you had this big, huge policy response. It wasn’t really the Fed so much, it was mostly the US Treasury, I would argue, that really caused a lot of the inflation because the government… the Treasury spend six and a half-trillion dollars in the last 12 to 18 months. The numbers are colossal. And so, it’s interesting because mainly going forward, those numbers are not going to continue.
Cullen Roche (00:20:51):
We’re likely to run trillion-dollar deficits going forward, but we’re not likely to run six and a half-trillion dollars of spending year after year after year. And so, you don’t have the sustained fiscal tailwind that caused a lot of the inflation that we’re experiencing right now. And I think as a lot of these things taper off, you are likely to see prices that look what the Fed would call transitory but that will end up probably not being as transitory as the Fed, I think, expects…
…Cullen Roche (00:33:11):
But I think we tend to have this view that the central bank is the money printing entity, and that the central bank has the big bazooka. And I think what we’ve learned in the post-COVID period is that it’s actually the treasuries that have the big bazookas. And a lot of what the central banks do, and I discussed this in a lot of my papers on the operational dynamics of things like the monetary system and quantitative easing, that the central bank, to a large degree, is a secondary actor in all this.
Cullen Roche (00:33:43):
That the real money printing, if you want to call it that, is done by the Treasury. And so, to use a concrete example, when the Treasury runs a deficit, meaning that they spend more than they actually take in in tax revenue and they end up having to borrow, you could call those bonds. They’re printed from thin air. They’re completely net financial assets. If the government was to finance their spending by dumping cash on the ground, for instance, rather than dumping bonds on the public sector or the private sector, they would literally be printing cash.
Cullen Roche (00:34:18):
They would literally be printing money. And so, of course, we don’t do that in the modern era. We finance spending by printing bonds, basically. But those bonds are net financial assets. And what the Federal Reserve does, to a large degree, is they come in after the fact. And when they implement something like quantitative easing, they’re just changing the composition of the financial assets that the private sector then holds. So, they’re printing a reserve deposit and they’re exchanging it with the bond.
Cullen Roche (00:34:49):
And if you think about this from the order of operations, well, they’re just exchanging the different types of financial assets. They’re adding a deposit and they’re taking the Treasury bond out of the market. So, where did the real money printing occur in this order of operations? Well, it occurred at the Treasury level. The Treasury’s deficit was the net financial asset. It was the balance sheet expansion that really matters. The Fed technically expands its balance sheet.
Cullen Roche (00:35:13):
But in the process of doing so, the way to think of it is that, yeah, they expand their balance sheets to create reserves and they buy the bonds with them, but then they remove the bond from the private sector. And so, what impact does that have? From a consumers’ perspective, it’s a lot like swapping a savings account, which is basically what a treasury bond is for a checking account. And ask yourself, how does your financial situation change when you swap a checking account with a savings account?
Cullen Roche (00:35:44):
It doesn’t really meaningfully change at all, except for the fact that you actually have a lower income now. So, I think you could make an argument that something like quantitative easing is marginally deflationary because it reduces the private sectors’ income. But that’s the big lesson from the post-COVID period versus the post-financial crisis period is that fiscal policy has a much, much bigger impact. You have to look at it comprehensively.
Cullen Roche (00:36:12):
You can’t just look at the Fed’s balance sheet and say, “Oh, look, we’ve printed all this money because”… let’s say we were Europe in the post-financial crisis period and we were running basically budget surpluses or negative or flat balance sheet expansion from the Treasury level. Well, who cares if you’re doing quantitative easing in that environment, because then, there really is no meaningful balance sheet expansion at the Treasury level. And the Fed or the European Central Bank is just swapping those bonds for deposits.
Cullen Roche (00:36:48):
And so, you’ve got to look at things comprehensively. And to make all of this even more confusing in the case of something like Japan, you have to consider all these other factors like demographics. And so, all else equal, fiscal policy is hugely, hugely important. And the degree to which those policies are implemented and then sustained will have a meaningful impact on aggregate demand and future inflation…
…Cullen Roche (00:56:42):
But the reality is that I think that those boring inflationary environments are much more important to protect yourself against because they’re just so much more likely to occur. I mean, the likelihood of the Weimar Republic occurring in the United States or something like that, or Zimbabwe, in my mind, it’s just super low. And so, if you’re going out planning for some environment and you’re building your whole portfolio around something like that, you’re building your portfolio around a really low probability, asymmetric bet that, yeah, it might have a huge potential upside.
Cullen Roche (00:57:17):
But the likelihood of it actually coming to fruition is just not very high. And so, it’s a lot more important to build your portfolio around the more likely outcomes, which is just that inflation, yeah, it’s always going to go up from the bottom left of that chart to the top right, and you have to protect yourself from that. And that means that the risk of a two and a half percent or 3% inflation is much higher. It has a much bigger impact on your overall quality of life than sitting around worrying about a Weimer Republic or a Zimbabwe.
Cullen Roche (00:57:49):
And so, the equity market as a whole has been a fantastic way to protect yourself and generate a real return, regardless of whether or not there was ever going to be hyperinflation. And so, from a pure purchasing power protection perspective, stocks as a whole are a wonderful way to protect yourself from inflation. And so, you’ve got to get really comprehensive about it. But from just a very boring macro perspective, thinking of stocks as a continual purchasing power protector is, I think, a useful mental model, a good framework to start with when you’re considering your purchasing power protection.
Stig Brodersen (00:58:34):
Let’s talk a bit more about it. Very practical about it because it’s often said that we should invest in real assets and not financial assets in a time of inflation. And so, your real assets, that could be precious metals, commodities, real estate, land equipment, natural resources. And to some people, including myself, some of that can sound quite intimidating because you want to have the actual physical asset. Do you want to store gold in your own home?
Stig Brodersen (00:59:02):
What do you do with those 100 barrels of oil, or whatnot, that you’re going to put somewhere in your garage, right? So, many investors, therefore, prefer to buy paper assets due to the convenience of not having to go through transactions with real assets. And this might sound confusing, since you can have paper assets, for instance, stocks where you own a company with many real assets. And so, could you clear that up for us, Cullen? What is the relationship between a paper asset and then this hedge against inflation through real assets?
Cullen Roche (00:59:38):
We call what we do investing. And a lot of what people do in the financial markets, it’s not from an economic perspective, it’s not technically investing. It’s really, we’re just reallocating our savings. And so, what I mean by that is that when a firm goes out, when an oil company goes out and they buy a million barrels of oil, well, they’re not going to do what you just described. They’re not going to take those barrels of oil and just stick them in their backyard and hope that the price changes.
Cullen Roche (01:00:07):
No, they’re typically going to do something with that oil. They’re going to literally spend for investment on it. So, they’re buying the barrels of oil, and then they’re doing something. Who knows, they’re turning it into gasoline or they’re reselling it to someone who is going to be able to purchase it to turn it into, who knows, tires or some other product that is actually useful in the long run. And so, what they’re doing is spending for future production.
Cullen Roche (01:00:36):
And that’s one of the things that, I think, people have to be cognizant of when they’re analyzing all this. And it’s one of the reasons why I generally if you’re going to apply like a macro rule of thumb to inflation protection, it’s nice to own the financial assets in large part because the financial assets reflect what the underlying spending for future production is actually resulting in. So, for instance, when you buy Exxon Mobil, you’re not just buying some piece of paper that reflects the craziness of what people think on Robin Hood.
Cullen Roche (01:01:16):
To a large degree, you’re buying a piece of paper that reflects the underlying value of what Exxon Corporation does with their spending for future production. And so, you’re getting embedded inflation protection in there, not because of just the underlying commodity, but really, you’re making a bet, to some degree, on how innovative Exxon Mobil is able to be with their barrels of oil and what they end up ultimately doing with those barrels of oil. Corporation is really… it is a real entity.
4. TIP472: Inflation Masterclass Continued w/ Cullen Roche – Stig Brodersen and Cullen Roche
Cullen Roche (00:02:46):
I’m sort of relatively well known for having been sort of a disinflationist or deflationist coming out of the financial crisis, because basically I understood that from studying Japan and their bouts with deflation and implementing quantitative easing, that when you look at it from an operational level, quantitative easing is essentially just an asset swap. It’s the central bank comes in after the treasury deficit spends, and then they exchange types of assets essentially. So the private sector ends up… losing a treasury bond and gaining a reserve deposit. And from a monetary perspective, you can have this big sort of boring debate about what is money, and is a treasury bond money-like. And in my view, a treasury bond is essentially like a savings account. And so, the private sector from QE, it gets a savings account and loses a checking account. So people don’t feel wealthier, even though from a very technical sort of economic perspective, the government has printed money, people would say, because people consider reserve deposits obviously to be more money-like than a treasury bond.
Cullen Roche (00:03:57):
And so in a traditional economic model, QE looks like it should be inflationary or even hyperinflationary when they’re doing trillions and trillions of dollars of it. But from a really, I think basic household perspective, all the household did was exchange the composition of its assets. And so the Fed’s response to… COVID was very, very similar. They had this huge balance sheet ramp up, they cut rates, they did all the same sort of stuff that they did during the financial crisis. But the difference between the financial crisis and COVID was that the treasury was the one that really ramped up their balance sheet and had this huge explosion. And so that’s why I was much more worried about inflation coming out of COVID than I was with the financial crisis, because of the treasuries humongous response.
Cullen Roche (00:04:49):
And so while I got the direction of inflation right, I think the tricky thing with all of this has obviously been the magnitude and the longer lasting effect of it. And I think a lot of that is just that I didn’t think there’d be… God, I didn’t think we’d still be talking about this thing at this point. Who could have predicted the Ukraine war, which Russia basically shuts down one of the largest commodity producing countries in the whole world. So there’s been all these sort of weird impacts that have, I think elongated the impact of inflation and made it a much trickier environment to navigate.
Cullen Roche (00:05:30):
But to me that’s the big lesson coming out of this, is the treasury and fiscal policy is really, really important. And that’s really important to understand going forward, because again, let’s put this in perspective. In 2021, as of the end of June at this time last year, the treasury had run a deficit of $1,7 trillion. These are huge, huge numbers again. So at this time last year, we’re still in the throes of really heavy duty fiscal stimulus responding to COVID. So far this year, through June of this year, the treasury has run a deficit of $137 billion. I mean, in terms of the way the US government usually spends and runs a deficit, this is almost a surplus, which is very, very unusual. So on a relative basis, there has been a huge fiscal tightening. So people talk about the Fed and how the Fed has raised interest rates. And a lot of that has caused this sort of retrenchment in demand and tightening of the economy. And the thing that’s lesser talked about is this huge decline in the relative size of the government’s deficit.
Cullen Roche (00:06:50):
I think when you combine these two things, raising interest rates is a very, very powerful mechanism, because especially in a time right now, it can cause a lot of turmoil in the housing market. We’re starting to see that already. And if you adhere to the theory that the US economy basically is a housing economy, well that’s troublesome from a demand perspective. So high mortgage rates have snuffed out demand for mortgages, made it basically unaffordable for… they’ve locked out another 40 million people with the rate increases from the last few months. So huge, huge numbers. So demand is coming way back, and that has this huge knock-on effect through the whole economy, because when you think about everything that goes into a house, think about the demand for how furniture now goes down, and refrigerators and appliances and all these other things that have a knock-on effect through housing.
Cullen Roche (00:07:45):
But then when you combine that with the fiscal retrenchment, there’s been a big, big government tightening. So we had this big explosion in government spending, in government stimulus in general, and now we’re having a big, big give back. And if the government had continued to do these big programs in perpetuity, that would’ve worried me. I hesitate to say anything like hyperinflation, but a much more prolonged, a 1970s style rate of inflation, where you had double digit inflation that lasted for basically 10 years, that’s a much more plausible scenario under those circumstances. But right now the opposite is happening. And so, how fast will it come down? I think it’s going to come down relatively slow, but I think that we’re now… I think disinflation, meaning a falling rate of positive inflation is going to become fairly well entrenched in the economy over the course of the next 18 to 24 months.
Stig Brodersen (00:08:44):
On your wonderful blog pragcap.com, you said, and I quote, “There is no chance of hyperinflation. I would argue that the risk of deflation is substantially higher at this point than the risk of hyperinflation.” Could I please ask you to elaborate on that?
Cullen Roche (00:09:00):
Yeah, so I think going back to that forward-looking expectation of a recent trend in the fiscal retrenchment, and the Fed’s big attempt to really snuff out inflation, I think that the risk of deflation now becomes greater, because I think that these are both very, very outlier events. So we’re talking about pretty unusual things to begin with, but the risk of a mini 2008 repeat, where let’s say housing prices. I expect housing prices to fall 5% to 10% over the course of the next 18 months, and that’s kind of my base case. So housing is going to be relatively weak I think over the course of the next year at a minimum. There is a chance that I’m wrong about that, that the Fed response is much bigger than we expect, that they’re much more aggressive and much more prolonged with it than we expect. And that housing falls more than I expect.
Cullen Roche (00:09:59):
I mean, housing boomed so much during the pre-COVID period and then the COVID period that you could easily get a 20% retracement in house prices. It wouldn’t surprise me at all if something like that happened, and that would have a very big negative impact on the economy. I think that if that happened, by the time that plays out, let’s say it’s 2024 and housing prices have fallen 20% from their peak, I think at that point, there’s a very good chance that CPI readings and the Fed’s preferred measure core PCE, Personal Consumption Expenditures is negative at that point. And that’s just going to be a function of demand just falling off of a cliff, and this huge knock-on effect from the negative housing market.
Cullen Roche (00:10:46):
So to me, that’s a much, much more likely scenario than a hyperinflation, because in large part, because if you’ve read my research in past years, you know that hyperinflation generally occurs under very, very unusual specific scenarios, usually scenarios such as very corrupt regimes, a government losing a war, a complete regime change in the government, these sort of really seismic events that are very disruptive at a government level. And the government usually responds to that by then printing huge amounts of money. So while we’ve technically printed a lot of money in the last two, three years, you haven’t had this big sort of disruptive geopolitical event at a government level that I think has caused a complete collapse in the faith in the currency. And in fact, I would argue that if anything, what we’ve seen in the last, especially the last 12 months is, if anything, we’ve seen increasing demand for the dollar in a relative sense.
Cullen Roche (00:11:50):
So to me, it’s very hard to envision… yeah, if we were having this discussion and we were sitting in Nigeria or something, it would be a totally different discussion. But when you’re talking about the world’s reserve currency, you’re still talking about on a relative basis. And even if you believe all fiat currencies are trash, the US dollar is the least trashy of the trashy currencies. So it’s very hard for me to envision a scenario where you get this huge collapse in demand for the currency in large part, just because the US economy’s important role in the global economy, and combine that with just the fact that you don’t have the environment for this sort of seismic shift in faith in the currency…
…Stig Brodersen (00:47:42):
Cullen, let’s continue with this thought experiment. Let’s say that we would go into a prolonged period of not only disinflation, but for example, two decades of deflation. And I just wanted to clarify, disinflation is a lower but still positive inflation rate, whereas deflation is a negative inflation rate. So how would consumers and investors need to adjust to this prolonged deflationary period?
Cullen Roche (00:48:06):
Man, one of the most interesting charts I’ve ever seen is Japanese real estate in the last 20 to 30 years. I mean, we’re so used to, in developed world, real estate prices just always going up pretty much. That was a part of what everyone kind of knows. That was part of what caused the financial crisis to be so bad, was that in the economic models, all these investment banks assume that real estate prices just either wouldn’t go down or wouldn’t go down very much. And so when real estate prices went down 20%, 30%, obviously that caused… it threw a wrench in everything. And in Japan though, real estate prices have been going down for 20, 30 years, which is sort of unfathomable in the United States. But it’s something that… that sort of a scenario, I mean, it keeps me up at night to be honest, because again, the real estate market is such an impactful instrument in the entire US economy. You’d have very, very low rates of growth.
Cullen Roche (00:49:11):
I mean, in that sort of a scenario, if that’s something that you expected or if you thought it was a risk, counterintuitively you’d want to own a ton of bonds. So bonds in Japan were the thing that hedged people from… people talk about how the Japanese equity market has been down over this lost decade or whatever. Well, the thing that people don’t always point out is that if you owned a 60/40 portfolio denominated in yen, where you own the Nikkei for instance, and Japanese government bonds, well, you actually did okay, because the government bonds performed so well that your relative performance was okay. So diversification actually worked out in Japan, because of the bond component.
Cullen Roche (00:49:59):
But the same sort of scenario would play out in the United States, where people are worried about inflation now. And they’re worried that, oh, bonds are dead. But if you got prolonged entrenched deflation, the bonds are the things that would perform really well in that in terms of an asset allocation. So again, going back to that all-duration or all-weather sort of perspective, it’s why I always advocate, I always tell people, you always need to hold some cash and short-term bonds, and even some intermediate potentially long-term bonds. Treasury bonds, they’re sort that deflation insurance product, super long duration instrument.
Cullen Roche (00:50:37):
But yet, in terms of an economic outcome, it’s hard for me to imagine that wouldn’t be a disastrous scenario, that it wouldn’t be coinciding with something much more negative in terms of what’s occurring, just because in order to get the 20-year period of entrenched deflation, you’d have to have not just negative probably demographic growth, you’d have to have declines in productivity, and really almost like 0% GDP probably for decades, which would not be… obviously would not be great.
Cullen Roche (00:51:14):
So is that going to happen? Personally, I think that’s a low probability, just because the demographic trends, even as bad as they are in the United States and some of the developed world, they’re not necessarily going to be negative. And I think productivity will continue to be relatively strong. And it’s hard for me, united States is still such a real estate based economy that when you look at it in the long run, I mean, God, looking at it from a supply perspective, one of the problems in housing is there’s a huge shortage of housing. And so in the long run, are we going to stop building homes in the United States? Using a crude “housing is the economy” sort of model, it’s hard for me to imagine that even with the ebbs and flows in the long run, there is a lot of building to be done in the United States in terms of building out the real estate market.
Stig Brodersen (00:52:09):
Well said. Now Cullen, let’s transition into the next topic of today, which is the concept of the Fed put, which dates back to the era of Alan Greenspan, the former chair of the Fed. Starting with the stock crash of 1987, the Fed cut rates whenever share price is plunged. If you are an investor, it resembles the benefit of a put option where your downside is getting cut. Some argue that we’re now heading for a time with a Fed call, which is exactly the opposite, meaning capping the investors’ upside. We know from studies of the Wealth Effect that the wealthier people feel they are from their stock holdings, the more they spend. One study from Howard University shows 3 cents of increased spending of each dollar an increased stock wealth, plus increased employment and wages. All of this adds to inflation, which currently seems to counter the main objective of the Fed. So with all of that being said, do you think Cullen that we’re heading into a period of the Fed call?
Cullen Roche (00:53:03):
There’s a lot of different transmission mechanisms for monetary policy. And to me, interest rates are a very powerful policy lever. I do not think… people tend to think, when people talk about the Fed put, they often talk about quantitative easing and the balance sheet expansion. And I don’t think quantitative easing is as powerful as a lot of other people tend to think. And I think that drawing these correlations between the Fed’s balance sheet and the stock market, to me is just sort of silly. I mean the Bank of Japan increased their balance sheet for decades, and the Nikkei had a marginal correlation to these changes. Or ECB also, the European stock markets performed, on a relative basis, horribly compared to the US stock market, and the ECB was ramping up their balance sheet. It seems like there’s very mixed evidence on whether or not the balance sheet expansion really is the… is that the Fed put?
5. Milan lab man brings unorthodox science to Premier League – Sean Ingle
The patient is lying half naked on the treatment table in a clinic not far from Harley Street watching his feet being pressed together, rotated, tested. His pelvis is checked and he is asked to open his mouth. Finally Jean-Pierre Meersseman, founder of the world-renowned Milan Lab and special advisor to Milan, speaks. “Your pelvis is tilted, one leg is shorter than the other and you have suffered from groin injuries,” he says, correctly. He then applies local anaesthetic to an impacted wisdom tooth and suddenly the range of movement in the right leg significantly widens. “Ah, just like Clarence Seedorf!” he exclaims.
“When Seedorf came to see me he had continuous groin pain which had been bugging him for a year and a half,” Meersseman says. “He couldn’t practise properly and was on a downward spiral. I remember the first day he was at Milan I had his wisdom teeth pulled out. The pain in his groin went away immediately and that helped rebuild his career.”
It is an anecdote that short-circuits the senses. It sounds too fantastical to be true. But this is Meersseman’s forte: doing the unusual with the unorthodox, combining his specialisms of kinesiology and chiropractic with traditional approaches. Still the question needs to be asked: what would the sceptics make of how he treated Seedorf?
“It’s not accepted in evidence-based medicine but I don’t give a damn about that,” he says, genially but firmly. “I’ve seen it work. We’ve done over one million tests at Milan. And our mathematicians and engineers have developed a formula which has a high success rate of predicting and managing injuries.”
Meersseman backs up his case by citing the steep decline in days lost to injury after Milan Lab was set up in 2002 thanks to a programme that also helped enabled Paolo Maldini and Alessandro Costacurta to play into their 40s, with Serginho and Cafu not far behind.
“Paolo Maldini was written off at 32 and he played another nine years,” Meersseman says. “And I remember when Cafu came in, somebody called me up – I won’t say who – and said I know for sure he is gone. He played another four years at a very high level.”…
…Meersseman was given the task of reducing injury rates at Milan after Fernando Redondo, the brilliant Argentina midfielder, suffered an injury that was to end his career shortly after joining from Real Madrid in 2000. The club asked itself: why did we not see that? They started to talk about prevention. And Meersseman starting looking for answers.
“With Redondo we did a complete medical examination when he signed – and I mean complete as it involved 10-12 different specialists, from the tip of his head to his toes,” Meersseman says. “He was in perfect condition. And then he was walking on the treadmill and he tore a muscle. I’d never heard of anyone doing that. He never really came back.”
So what changed? “Just by using kinesiology we are able to see better what is going on but that was my opinion against someone else’s,” he says. “That was one of the reasons why I started measuring everything. All the top clubs have cardiologists, knee specialists and so on – but sometimes it’s difficult to look at the whole and that’s what we are trying to do.”
6. RWH012: Fear The Fed w/ Jim Grant – William Green and Jim Grant
William Green (00:18:35):
Then you went to Barron’s, right? From something like ’75 to ’83? And you originated the current yield column. And I wanted to ask you about that period because it must have been an incredibly formative period, because for those of us who… I was born in 1968. So I wasn’t really aware of what was going on at the time, but this great inflation that ran from 1965 to 1981 was forming the backdrop of your career in those days as a financial writer. And I wondered if you could describe for us for those of us who didn’t experience it firsthand, what you saw and how it shaped your views about the importance of sound money, fiscal discipline and the like. Because it must have been kind of a rude awakening to see. I think, didn’t inflation hit something like 15% in 1980? I mean it was a terrifying time.
Jim Grant (00:19:26):
Yes. Although it became rather… One became rather acclimated to it. I think never wholly adapted to it. But my goodness. Inflation rate had been tripping up since 1965. And the authorities then as today said, first of all, “Not us. Oh, we didn’t do it.” And then, “This’ll pass.” And then actually before very many years had gone by, William McChesney Martin, who was then the Fed chairman and a great rhetorical foe of inflation, would give these speeches say condemning it and vowing to slay it like a beast. But towards the end of 1967, in close confines of the meeting of the Federal Open Market Committee, he said, “The horse of inflation is out the barn.” So he was about ready to give up.
Jim Grant (00:20:21):
I said, “Most we can do is make sure this steed does not gallop too far, too fast.” So then ensued, year upon year, the deteriorating purchasing power of the dollar, of rising interest rates, of contracting, what we call valuations for stocks and the price you pay in relation to what the company can earn. Is valuation. Where we express this as a ratio of stock price to profits. Call it a price earnings ratio.
Jim Grant (00:20:53):
And during the good times the stock prices go up and people are going to pay a higher and higher price for a given dollar of profit. And when inflation hits and when interest rates go up, the opposite happens and people pull back and they’re willing to pay less and less per dollar of profit. And that was the story of this great inflation. There were of course ebbs and peaks and undulations. And one of the things that happened then, that I think is very great relevance today, is people were all too ready to declare an end to things when inflation receded. Now nothing says that today is going to repeat the experience of yesteryear. In fact, rather the odds are against that just simply because history is never… It’s never so helpful as to repeat itself literally, otherwise imagine how rich the historians would be. They say, and what they say is true, that one’s first experience in markets and with money is deeply formative, imprints itself on you. And the best investors, the nimblest and most successful are the ones who can put that formative experience aside, or at least put it into perspective and not imagine that they must repeat the experiences of their youth in their middle years. And perhaps that experience was too deeply imprinted on [inaudible 00:22:18]. I have, I guess, have seen inflation under rather too many bedposts, under too many mattresses as the years have gone by…
…William Green (00:45:07):
… No, it’s really good. And I’ll include a link to it in the show notes here. You said at one point the Federal Reserve is the most dangerous financial institution on the face of the earth, and then you described them as the handsiest people in finance, which I liked. So you were saying how they’re always meddling and having to improve and intervene and interject. Before we get to the current problem, is there just this illusion that it’s helpful to intervene and interject? Why … where’s the philosophical difference that you have and that someone like Jerome Powell, the Fed chief, has, in terms of believing that it’s worth meddling, or actually dangerous to meddle?
Jim Grant (00:45:49):
Well, I think that the Fed believes … I know the Fed believes, because they do this stuff, the Fed believes that they can select a rate of interest, a policy rate of interest, that will at once encourage maximum employment, minimize the rate of inflation, and keep the financial markets percolating. And I say, many of us say, that that rate is known not to God, but to individuals operating in a free and untrammeled market, and discovering, that word is price discovery, the phrase is price discovery, discovering a rate of interest. And what makes the discovered rate of interest better than the artificial or the imposed one, is the discovered rate of interest is the product of decisions taken by people who have no idea what their counterparties are doing, but they are all trying to maximize their own welfare, and the world. They all go to work in the morning, wanting to do better. They make decisions, so the conflation of these million decisions is going to give us a better outcome than the somewhat arbitrary and necessarily ill-informed pronouncements of the former college economics professors who populate the halls of the Federal Reserve.
Jim Grant (00:47:08):
We call this … we call the current standard, we call it PhD standard, a stigma from the gold standard or other standards of yesteryear, and ages ago, in 1930s, so that’s ages ago, a while ago, there was an economist named I think Henry Simons, University of Chicago, who said that business enterprise ought not to be a speculation on the future of monetary policy. That’s kind of what it’s become. Everyone has to know what the Fed is doing. The Fed has become ubiquitous, or handsy, as some politicians we know. It has become like the referee in the football game, or a soccer game. Or cricket or baseball. I’m trying to help you.
William Green (00:47:56):
Proper game. Cricket.
Jim Grant (00:47:59):
So when you get to know the name of the umpire or referee, you know that umpire or referee is not doing a job, not doing his or her job right. That person is supposed to be invisible. The game is the thing, right, and not the rules. When the rules are paramount, and the arbitrary decisions of the referees are paramount, that is not a game, it is a … I don’t know, Kabuki theater, whatever it is, it’s not the game we came to play. And I think that we’re not playing the game of enterprise as we ought, because the Fed is too much with us.
William Green (00:48:35):
So now we’ve explained to some degree the causes, the backdrop that led to this mess. Let’s talk in some detail about what can or should be done to fix it. So yesterday … this podcast will be coming out in a couple of weeks, but yesterday the Labor Department announced that inflation has been rising at a rate of 9.1%, cost of food was up, I think, 12%, in the last 12 months, electricity up nearly 14%, gasoline up about 60%. So first of all, I mean the most obvious question, it sounds so mundane, but I actually like to ask it, why is inflation so fearsome? Why is this thing that we’d kind of forgotten, this looming Loch Ness monster, beneath the surface of the financial waters, so terrifying? Why suddenly is everyone sitting up and saying, “Oh God, there’s a real problem here”?
Jim Grant (00:49:24):
Well Nessie, I think, might not exist. I don’t know for sure. But inflation was consigned to the status of Nessie by a generation of economists who, like preceding generations of economists, 1960s, believed that they had found the philosopher’s stone. And they, through their dextrous manipulation of this and that lever of policy, could forestall and ameliorate, as I said in the case of … Okay, so that was the conceit, but I think, to go back to a sporting metaphor, I think that muscle memory played a great part in conditioning everyone to expect everything except inflation. Now, if you were to simply ask the following question, the answer is going to be, yeah, inflation. And the question is this. What will happen when the government pays people not to work, when indeed it subsidizes the lack of production through various rules and regulations, when it materializes money as it has never materialized those dollar bills before, and as it borrows and spends in the space of 18 months as it has never done before. What is likely to be the outcome? And any schoolboy of yours would say, “Yeah, inflation.”
Jim Grant (00:50:47):
Notice that no one said, “Of course, inflation.” There’s a baseball story, 1968, Bob Gibson was the reigning pitcher in baseball. Imperious, majestic, dominating and domineering figure, was Bob Gibson, St. Louis Cardinals. He played with an infielder named Ducky Schofield. Ducky was very good in the field, not much of a batsman. Batsman, that’s cricket term.
William Green (00:51:15):
Yeah.
Jim Grant (00:51:16):
And one day Ducky strikes out, storms back to the bench and curses up a blue streak, smashes the water cooler, and Gibson can’t stand him. He summons Ducky to the end of the bench and points to his batting average, which was .226. He says, “Ducky, what did you expect?” So similarly, today, with inflation, what did they expect? Well what they did not expect was the obvious [inaudible 00:51:47] piece it together by all of us, but the fact that it was not obvious speaks to muscle memory and speaks to the conceit of the economic forecasting fraternity, and it speaks simply to, I guess, to the foibles of human perception…
…Jim Grant (00:52:19):
Ah, okay, I want to digress with a story. Years ago there was a bunch of medical scientists, got together to examine a cadaver discovered in the melting ice in the Italian Alps. This thing was called the Iceman, right? So the greatest heart specialist and physiologist, I mean, anatomist, people with a scientific interest in the human form, came to the relevant hospital in Italy to examine this Iceman, right? And they spent weeks going over it with the advanced tools then available to them, x-rays and things that I can’t know. And it wasn’t until the very end that someone said, “Yeah, there’s the arrowhead right there.” And the relevance of this is that … and the ones who missed it were so embarrassed and so humbled. And we wrote a piece about this and headline was Perils of Perception, and our story wound up that the scientists who missed this were not … they didn’t have financial … they weren’t leveraged in the market betting on some outcome. They didn’t have an options position open. They had no financial interest in the outcome. They were studying this as disinterested academics. They missed it. So we wound up saying, [inaudible 00:53:41], So how is it that with people through force of financial interest, client interest, how are any of us solvent, given all of the impediments to clear perception of finance?
Jim Grant (00:53:59):
So that’s why things periodically get so messed up. Everyone has a different set of perceptions, but the population of people who are paid to have a disinterested perception, it’s a very small population. And of course they are human, right?…
…William Green (01:03:04):
Is your bet that the US economy can escape a recession, or is your bet that it’s going to get pretty ugly? I mean, I know that-
Jim Grant (01:03:14):
Well, here we come face-to-face with personality and character and vested interest, right? So, what would be better for Grant’s than calling another disaster? I can imagine the motion pictures. I can imagine … a parade is probably a trope, but I can imagine our circulation going up a lot, so I-
William Green (01:03:38):
The Big Short Part 2.
Jim Grant (01:03:39):
Right? So, without obsessing on interior dialogue and motivation, what I try to do is to reserve mind share, mind space, for the not impossible outcome that things work out. The United States economy is something that has demonstrated the greatest resiliency over the years. And I mean, I think one hears rather too much about American … What is it called? American … not singularity, but exceptionalism, right? But America is exceptional in many ways. Certainly, its economic history is exceptional. There’s a can-do spirit here, there’s a spirit of enterprise that not even the Fed can extinguish through its maladroit policy maneuvers, or President Biden extinguish through recent elections, from the pulpit. So yeah, it’s possible that through luck, and maybe the Fed’s learned something.
Jim Grant (01:04:37):
So I think that the question then becomes, where do the risks lie, and where do the opportunities lie, given that the outcome is indeterminate? Are you being paid well to think one thing that is possible, indeed probably? Are there bargains, in other words, are there bargains that people are neglecting because the world was so single-mindedly focused on- And I don’t see many just yet, but we have a very good equity analyst here, who does other things well, but his name’s Evan Lorenz. He’s the deputy editor for Grant’s, and he does fabulous work in analyzing individual stocks. So, we had been very bearish on Facebook. But the current issue came out, and Evan did this fine work, and he says that Facebook is now buy. It’s cheap on its merits, on its earning power. It has been unduly punished for its foibles and its managerial errors. And now, we ought to pay attention, because it is now a value-laded stock. There’s a margin of safety.
Jim Grant (01:05:37):
So there are these opportunities cropping up. The risk is, I see this a lot in people who manage what’s called valued portfolios, is that the cheap stocks do go down with ones that are too expensive. I know of value investors who have suffered losses this year on the order of 20% or more, although they thought the stocks they owned were so cheap that they were inured to such things, but no. So it’s been a brutal year for many people. But in answer to your question, what we try to do is keep scouting for opportunities. We don’t see it in the bottom market, although if there’s a recession, bonds will go up in price, and down, and interest rates will fall, likely. We see opportunity in gold stocks, which are almost universally ignored and scorned. They’re about as cheap as they’re ever been in relation to the metal. But if the Fed is seen not to have the great answer, if the Fed is seen to be the institution you must protect yourself against rather than to trust in, in that case, this is an area, especially for as long as I’ve been alive, almost, in that case, gold’s going to do very well.
7. It’s OK to Be Bearish But It’s Not OK to Stay Bearish – Ben Carlson
Things don’t seem great at the moment.
The Federal Reserve is actively trying to push the stock market down. Inflation is the highest its been in four decades. Interest rates are rising. Both stocks and bonds are down double-digits from the highs.
There is a good chance the Fed will try to push the U.S. economy off a cliff right into a recession.
“Don’t fight the Fed” has taken on a new meaning when they’re openly rooting against the stock market.
It’s easy to be bearish right now.
Plus you have the fact that this is the first prolonged bear market since the Great Financial Crisis:..
…There have been a handful of corrections and bear markets since early 2009 but the only one that came close to matching the length of the current iteration was in 2011.
But the 2011 bear market (-19.4%…close enough) at this point was already in the midst of a recovery. We’re not back at the lows but the stock market has been heading back down yet again. And we’re now heading into month 9 of this drawdown.
It’s easy to be negative right now but it’s always easy to be negative during a bear market…
…Instead of going back and forth between being bullish or bearish, I prefer to remain calm-ish.
We already know stocks are going to be volatile. Why should you care about market fluctuations if you know they’re not going to last forever?
This bear market could last longer. Stocks could go down more. Or we could see new highs in a matter of months.
I honestly don’t know.
But successful long-term investing comes from letting go of the desire to pretend like you know what’s going to happen all of the time.
If you don’t need the spend the money in the near-term, you’re going to have to become comfortable with seeing the value of your portfolio go down at times.
And if you do need to spend the money in the near-term, why is it invested in the stock market in the first place?
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Apple. Holdings are subject to change at any time.
