Peter Boockvar (Inflation or Deflation/ What should the Fed do?/ Best investments right now)
- 00:01:37 Are we headed for deflation/ inflation or stagflation? How does Peter read the tea leaves?
- 00:08:33 Is regulation ultimately to blame for inflation?
- 00:13:57 Is the Federal Reserve to blame for the current crisis?
- 00:23:56 How does ‘yield curve’ work? Why is it so important?
- 00:30:34 How can we improve government policy (and Federal Reserve policy) to increase economic growth?
- 00:34:43 Can we really withdraw from the policy of ‘cheap money’ that most other countries in the world follow?
- 00:38:23 Is the European Union monetary regime likely to survive the next 10 years?
- 00:42:02 Will the Singularity jumpstart our productivity growth?
- 00:46:08 Is inflation just a clever federal tax scheme?
- 00:48:40 What countries are the best suited to increase economic growth?
- 00:52:35 Are precious metals up for a great run?
- 00:58:29 What are Peter’s favorite investments right now?
You may watch this episode on Youtube – #65 Peter Boockvar (Inflation or Deflation/ What should the Fed do?/ Best investments right now).
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Torsten Jacobi: Hey, you are one of the foremost experts to a topic that has been vexing me and also other guests here on the podcast. We feel like there is this macroeconomic view out there in the stock market that can’t really decide are we going towards a period of deflation, inflation or maybe stack inflation, something that is a little bit in between those two extremes. What is your opinion and where do you take that knowledge? How do you read the tea leaves?
Peter Boockvar: First, I’d like to break down inflation among different things because when people hear inflation, it’s either either or but inflation is a lot more nuanced. We have services inflation, we have goods inflation and consumers they spend on one or the other and most obviously spend on both. If you look at the service side of at least the US economy but overseas as well, we’ve seen persistent pre COVID services inflation of two and a half to three percent per year and a lot of that is rents, medical care, insurance, tuition, just things that seem to always go up every single year. You go to a movie theater, every single year there’s a price increase. You go by concert tickets, every single year there’s a price increase and that is pretty sticky. On the good side, the offset to that services inflation has been goods disinflation or deflation and all you have to do is look at technology. Technology is one of the greatest deflationary forces in the history of the world and that’s not something that’s new, that’s been going on for centuries and every new progression in humans achievement has been led by technology in some fashion that leads to more efficiency and usually decline in prices but certainly since the early 80s when technology via the PC really started to take center stage in a lot of our lives, we know that we’ve been able to get more computing power for less cost but even aside from the direct technology uses, just production just generally becomes more efficient over time and usually that helps to limit or even reduces the price of goods. What we’ve had post COVID is on the service side, services inflation has decelerated because people of course have spending less money on services and of course also on the rent side since housing is a very important component of the services side of inflation. We’ve seen big rent declines in some of the big states in the US, some big cities I mean San Francisco, New York, Chicago and that has offset continued rent increases in other second tier cities and also in the suburbs but on the flip side we’ve started to see an increase in the prices of goods which is a different landscape than we’ve seen as I mentioned years prior and a lot of that has to do with supply chains that got turned upside down because of COVID and also rising transportation costs where every single good that’s manufactured in the world ends up on a plane, a boat, a railroad or a truck and if those transportation costs are going up on top of the rising costs of producing goods because it’s harder to get parts to it and the rising cost of labor and we know that COVID has turned upside down assembly lines and employee staffing and so on that all combines for a rising goods prices. So the question is, is the rising goods prices so called transitory which we hear that word a lot from central bankers and they believe that it is or is it something that will be more longer lasting and with the vaccine rollout and a resumption of spending on services are we going to see an now an upward reflection inflection in services inflation and when you combine the both pieces are we going to start to see higher levels of inflation for more than just a transitory period of time but something that is is more longer lasting and I’m in that camp I think it’s not just a few quarter events I think it’s something that will last into next year now supply chains will at some point normalize so the goods pressure pricing pressure will will ease somewhat but I think that will take longer than people think and I think that while I’m not looking for high inflation I’m looking for higher inflation and in the context of a world of interest rates that are very low higher inflation matched up with very low interest rates is not a good combination and that’s what I’m keeping my eye out for.
Torsten Jacobi: It’s really interesting how you break that down when we talk about inflation I think everyone is so focused on the CPI measurement right it’s been around for a long time but obviously has a lot of flaws and there’s a lot of inputs into this common denominator and we know that David Rosenberg was was was telling me you know there is this major drop in and as you just said in the service economy so and oil prices are down so I mean they obviously play a big part in what consumers spend so this is a big drop right now unless you say the products prices are up they are definitely seeing the stress right now.
Peter Boockvar: Well you mentioned oil prices were commodity prices have also been an area that we’re beginning to see a big move upward food prices are now at multi or highs even energy prices you know oil back to 60 dollars and that’s the highest we’ve seen in a while the CRB raw industrials index which captures a lot of raw material prices a lot of which are not necessarily traded on on markets but are key components of the of the supply chain that’s at the highest level in about eight years so the commodity side also is seeing price pressures as well and you know getting back to energy you know price that most people see every day gasoline prices you know they’re rising as well.
Torsten Jacobi: One thing that I was always curious and you broke it down earlier so I find this really interesting is one part of inflation seems to be we see it more in regulated economies right so we we see the demand eventually growing and then the supply can’t hold track with what’s going on at demand side so we see higher prices very naturally so it happens in service industries you know we we can’t just build housings where your supply restricted say San Francisco all as Angel as you mentioned New York you mentioned those earlier so naturally prices have to come up and they jump quite a bit I mean in San Francisco we jumped 100% over the last couple of years and we went down 50% so there seems to be some reverse to the mean going on and it seems healthcare and you know universities they also jumped in price and pre covid because we see there is heavily a regular regulated industries and demand simply outstrip supply and it doesn’t change what would you think if and in China we saw the opposite right so we saw there was there was no real major impact on bringing product into the US from China so we saw prices dropping as more and more Chinese manufacturers came online over the last 20 years do you believe and that’s obviously a wide ranging question if we get rid of most of the regulation that we now think is just red tape it doesn’t really help us would we see a much more tame inflation scenario than what we see right now.
Peter Boockvar: I believe so because it would be more market forces that would sort of create its own equilibrium that is not artificial you know you talked about how you know you look at US housing well Fannie and Freddie were a main draw Fannie and Freddie and very low interest rates for too long to you know the central bank and Fannie Friday the two government entities led to the housing inflation that we saw in the mid 2000s what are we seeing now we’re seeing housing inflation again we’re seeing annual home price increases of 10 plus so yeah in some markets it’s state or city type restrictions on the supply of housing that certainly adds to that inflation but it’s also Fannie and Freddie that are now controlling a huge chunk of the US housing market obviously low rates so yeah the government has caused housing price inflation which prices out a lot of people and and and those particularly first time home buyers that have to save up for a down payment and while lower mortgage rates helps to mitigate somewhat that rise in headline prices it still creates a big distortion you look at education well the government basically runs a student loan industry in the US and if you make the access to to credit too easy well then it just gives the universities sort of free license to continue to raise prices four or five six percent then becomes then you need a bigger loan and then they continue to raise prices then you need even bigger loan and it just becomes this self fulfilling prophecy then you talk about health care we know that the US government is a large payer in in health care and while Medicare and Medicaid reimbursement rates are kept artificially low it’s the government presence in the markets that is responsible for 20% annualized increases in insurance and if the third party is paying for a lot of the health care services and medical supplies well then they have licensed to increase prices and the example I like to give in health care is so about 10 plus years ago I got LASIK and LASIK is pretty much private pay well you’ve seen over the last 20 years price declines in LASIK because insurance companies aren’t subsidizing it it is actually an area of health care that’s free market and I think that that is a good example of prices being kept in check and even that go down over time where it seems like everything else in health care where insurance companies and government rates are involved prices only seem to inflate.
Torsten Jacobi: yeah I find that quite stunning because when you think about technology the US is very price competitive be that internet services be that actually devices like Apple and I go to Malaysia a lot and the devices are the same the internet prices for internet are similar I mean the connectivity is a little cheaper but then I go to my favorite dentist there and it’s about one fourth one fifth of what it would be for instance for a new crown and but the offices are brand new and everyone has like this 20 year old not just 20 year old interns but there’s tons of doctors with tons of experience and I feel I’ve been taking better care of them what I can get in San Francisco for instance so for me it’s striking that price difference technology it’s the same but health care it’s a huge difference between these two countries.
Peter Boockvar: so a similar example I was in Singapore the summer of 2019 and with my wife and my son and my son had um it’s having this bad stomach ache so we went to a raffles medical center in Singapore and what do you see at the front desk you see a price list of all of their services it was like a menu you go into a restaurant you see what they offer and you see how much it cost in the US you go to a doctor’s office there’s there’s no menu there’s no price list so it was that that pricing transparency in Singapore that has dramatically limited the price increases relative to what we see and other regulated parts of the world.
Torsten Jacobi: Yeah that brings me to that question when we look at the fat and a lot of people as scribe that crisis we are in so far or he did impending doom that’s how I talked about that with Jim Rogers said there is the biggest crisis that he’s ever seen is basically upon us not today but very soon and a lot of this is ascribed to the fat itself to the current fat president do you think it was really bad government policy that brought us to the state where a lot of people feel well we should better go into gold and silver instead of being with a dollar or do you think the passenger the fat itself is basically like a passenger in a train that is kind of a runaway train and they don’t really know what to do anymore.
Peter Boockvar: Well the train example is also is a good example I like to give you the example where the Fed and other central bankers or the bartender behind the bar that are consistently handing out free drinks and that those drinks are essentially cheap money which turns into loans and people bar too much and and they get drunk and and and some get into accidents after driving too fast you look at the history of the Fed going back to 1913 the purchasing power of a dollar in 1913 is about is worth about three to four cents today so the history of the Fed is to debase the currency reduce its purchasing power therefore reducing the standard of living of our people.
Torsten Jacobi: The sense of living is much higher than in 1913 for instance.
Peter Boockvar: Well it’s higher in the sense that we get to enjoy the advancements of life but what I mean is the purchasing power of one’s dollar buys you a lot less so that’s what I was referring to in terms of that I think what you’re referring to is more of the quality of life is is is much greater today because we we’ve advanced as a society and we’ve allowed you know the average person to afford a tv and an iphone and and and these low cost advancements of in life but generally speaking with central bankers is that that they sort of they convince society to make a deal with the devil what they do is they say okay I know you wanted to save up 20 for that house and that’s going to take you a couple of years through your income and savings and but I’ll make a deal with you if I lower interest rates and that will lower your monthly payment will you bring forward that purchase of the house because I’m going to make it cheaper for you to afford those monthly payments if I lower the interest rate will you buy a car today instead of saving up tomorrow so it entices the private sector to take and the government to take on more debt to borrow to bring forward economic activity to today from tomorrow so when I say the deal with the devil meaning that it encourages society both public and private to borrow and borrow and borrow and when you look back the history of of the post 1971 release from the the tether to to the price of gold we just you see the debt numbers that have just exploded so you mentioned Jim Rogers what he said you know a lot of times he’s referring to this extraordinary amount of debt that we’ve taken on as a society and I like to say that we don’t have normal economic cycles anymore we have credit cycles we have credit cycles that ebb and flow with the cost of money and we know that money got tight in 1999 into 2000 that was one of the triggers for the decline in the in the tech bubble we know money got easy which then encouraged the housing bubble then money got tight and that blew up and then post financial crisis money has been easy for a while and while households delevered a lot of that was mortgage related businesses levered up and we know governments have levered up so we are just addicted to cheap credit to sustain ourselves and and and now to the runaway train examples that you give is that now that now that that locomotive has really speeded up on the track speed up in the sense of taking on more and more debt it’s it’s really going to be difficult and painful to slow that train down because that means a period of delevering a period of less credit but that means slower growth that means and if that means higher interest rates that induces less credit because that’s the that’s the flip side when the Fed raises rates it’s trying to give you to borrow less make the cost of borrowing a little bit more so you slow down the pace of borrow well you slowing down that locomotive would be raising interest rates making the cost of credit higher but that also risks blowing up the stock market which is addicted to cheap money and we know the stock market and and credit markets are intertwined with economic activity as opposed to look at 1987 we had almost a 25 1 day decline in the stock market but it really had no impact on the economy because back then it was stock prices that really reflected the economy earnings rather than post green span having the stock market and credit markets drive the economy.
Torsten Jacobi: yeah it’s really fascinating the way you put this and i think the the the propensity to rain into to low interest rate seems to be out the window right so we have a little crisis and the interest rate goes to zero then we have a slightly bigger crisis and it goes to minus i don’t know what we hit minus 0.5 during covid and it seems stunning to me do you think there is and we know that money modern monetary theory right so it’s a term that people put out there and say oh we can’t be on the gold standard because it doesn’t work for us anymore and they say well i kind of ask you so why doesn’t it work for us anymore right and then the question is well this is for economies that don’t really grow but there’s no technologies so we actually have to finance this new growth and interestingly enough most of the time over a long term that self fulfilling prophecy that we say well we’re going to take a loan out basically you have the interest rates too low for what it would be good that would be up to to debate obviously but it’s a little too low and we we spend that money on loans so we kind of create the self fulfilling prophecy you better take that money and create something useful because if not we’re going to be bankrupt an interesting thing is that the US never went bankrupt in the last 100 years maybe we will do now but so far whatever crisis we produce we seem to do way better than anyone else out there who is have much often much tighter monetary policies not all countries you know some are real banana republics but there’s a lot of countries with very tight monetary regimes like Germany for instance who don’t do so well in the growth part which in the end decides the fate of your economy right it’s the real growth obviously that’s the imaginary growth from too low interest rates minus the real interest the real growth of the economy do you feel we should we should go back to and it sounds that way too much tighter policy much higher interest rates would be much better for the country.
Peter Boockvar: Well I think there there’s a withdrawal process just as as a heroin addict once they get off heroin there is a very painful transition and withdrawal process I think that we can’t just spike interest rates I think another way of and I’ll get to sort of answering that question is you know there’s this very simplistic central bank mentality even though a lot of them have PhDs is that low rates are good and if low rates are good even lower rates are better and if lower rates are better even lower rates are great and they just are under this assumption that the more they lower rates or the more money printing they do the more easing that is and I’m of the belief that over the last 10 plus years monetary policy has actually been restrictive and I’ll explain why negative interest rates look at look at what negative interest rates does to one’s yield curve look at Europe so it has horribly damaged the bank profitability in Europe and 80 plus percent of the loans given to businesses in Europe are from the banking system particularly small medium sized businesses that don’t have access to the capital markets well well if I’m a European bank and I have negative interest rates where I’m paying a penalty I’m at the point where I’m now charging depositors and you’ve left me really no yield curve to to gain a spread on well while I may have some spread because the ECB is literally paying banks to give out loans if that spread is relatively tight I have to be tight on my lending standards I have to be really careful to what extent I’m going to loan businesses uh loan money to businesses and households so if I loan less well it’s small and medium sized businesses and and and certain households that are just don’t have the same access to credit that companies bigger companies do with capital markets so that creates its own slower growth scenario and I think that’s what we’ve seen in Europe take Japan the Japanese bank stock index is down almost 90 percent in nominal terms from its peak in 1989 90 percent well we know the bank of Japan has basically killed off the yield curve now they have negative interest rates on the short ends.
Torsten Jacobi: When you talk about the yield curve so that I understand it say when the bank could still loan out say for 10 percent to whatever customer they want right why can’t they do it anymore I don’t fully understand that.
Peter Boockvar: Well they they well if you’re a low grade quality borrower a triple C rated company yeah you may have to pay 10 percent but a bank is also taking a lot of risk to bring in that 10 percent when they’re dealing with a triple C credit and particularly after the great financial crisis we know banks aren’t that aggressive when it comes to lending now that’ll be a certain portion portion of one’s loan book but not many businesses can can can grow paying 10 percent to their lenders.
That’s only but the fact makes no instructions right they basically say you we want to control how much you lend because it’s the money creation the biggest part of money creation kind of like mortgages that’s the other good example but businesses look business loans like credit card loans might be another huge portfolio and student loans obviously but the fact doesn’t really say you can’t loan it out to even triple A to 10 at 10 percent rate so if the banking industry comes together all the CEOs say oh you know what we don’t make any money why don’t we just loan out at 10 percent and then we make a ton of money to the best borrowers even in the country why can’t they do this why and just say well we don’t make any money with the low interest rate so let’s go up until they all die out that you know a lot of its competition when you think about what and things that that the the Fed does in central banks doing their lower rates is they they don’t allow you to they lower the risk free rate so then it becomes this self fulfilling prophecy on the downside that you lower the risk free rates almost nothing and pension funds and insurance companies and investors and individuals and they need some yield so they’ll do anything for for yield above that risk free rate so yeah the bank was was saying I’m gonna I’m gonna lend to 10 percent well you’d have some lender out there that say that price that’s not a bank that said uh yeah come to me I’ll give it to you for eight and then somebody else say I’ll give it to you for six because even that is so far above that risk free rate that there is a fight to lend money at anything above that risk free rate so it becomes a very competitive situation where banks for some creditors where there’s not much competition to lend to a to a low great credit at 10 percent but for any decent borrower generating cash flow or even a US household that has a high FICO score there there there would be too much competition that would lower that lending rate so but this the competition is always about the spread right so if the Fed says our our risk free interest rate right I think that’s what it’s called or that the rate that the Fed puts out is a number I don’t actually know how to say economy okay it’s five percent then the the competition would be about the seven percent that it’s being lend out to really great borrowers right so it’s always a spread that where most competition comes in right yeah bank doesn’t necessarily care what the absolute level of rates are they just want to basically have a spread between where they borrow whether that’s from a depositor or from a loan that they take on and what they can lend that money out I mean at the end of the day banks are still in in the spread business amongst other obviously parts of the business they have so if you if you lower the profit margin on their spread business now that then it becomes difficult that’s why Japanese regional banks are are like literally dying away because most of their business is the spread business whereas the bigger Japanese banks they have capital markets business and they have a lot of business outside Japan that they can they can offset and mitigate the pressures on their their Japanese domestic lending business but my point was is that if the banks are a key cog in the wheel of of lending to small and medium sized businesses that don’t have access to credit and you crimp the flow of that money then you actually reduce economic growth and here’s another thing that reduces economic growth forward forward guidance is is you know used buzzword of central bankers they say we’re going to tell the world that we’re going to keep interest rates very low for a long period of time and they believe that that is actually stimulative act economic behavior it’s actually the reverse because the whole point of fiscal monetary stimulus is to stimulate behavior today rather than tomorrow the example I gave before monetary policy but fiscal does the same whether it’s a short term tax credit it’s one time checks to people it’s cash for clunkers that we had in the u.s post gfc it’s a home buying tax credit it’s trying to pull forward economic behavior well if if monetary policy is we’re just going to keep rates for low forever essentially well then it reduces that sense of urgency to take advantage of those low rates people just sit around and say okay well I don’t need to rush because rates are going to stay low so to me keeping rates at zero were negative and just having them stay there is is is actually anti growth type policies because people aren’t incentivized to go out and and and take advantage of that because there’s no rush to yeah I heard my green made a similar argument to be honest I didn’t fully understand it it seemed really complex but his in his opinion the lowering at certain threshold the lowering at certain interest rates doesn’t actually reduce and or increase the the economic expansion it it leads to the stalemate I think this is where we are at now right now well yes still made and and I believe and actually restricts economic growth so yeah I’d go even one step further from him but I agree on his premise what do you think would be needed in order to come out of this scenario so we have this the basing of the basing of the currency the dollar definitely right so definitely in historic perspective we have lots of asset price bubbles that we’ve seen over the years and we we feel like the amount of opportunities that is available to a young generation that might be a slightly different reason but we have all these zombie companies and we have very little opportunities for the 20 and 30 year olds yes they can make some money and is the gig economy but building a career and raising a family is almost impossible at least in lots of lots of places in the US there is places where it’s cheap enough and also jobs are plentiful if you take this into account how and you would be able to steer the direction of the Fed and also maybe what their federal government does what would you suggest what it’s like top three on your list okay so you’re basically asking me if I was J. Powell if I was in J. Powell’s seat what would I do and what would you fix it what what I would do is and there’s no painful the painless way out I’d be straight with that just as Paul Volcker basically made that clear that there’s no no painless way out of a high inflation situation I would start with let’s start with QE I would say I we are beginning to taper there there’s no reason why we’re buying three or four year five year bonds out there you know in terms of maturities it’s doing nothing and we’re just throwing more gas on on a fire here with and with no clear transmission to better economic growth it’s just boosting asset prices so we’re tapering and we’re going to taper over the next six months and we’re going to end QE and then after that we’re going to start raising interest rates assuming economic growth and inflation trends are still higher first of all I would get rid of the two percent inflation target rooting for higher inflation basically saying we want to raise you talk about young people well by saying that we want to raise the cost of living well that hurts young people the most raising the cost of living that hurts young people the most so the Fed is actually doing damage to to young people who are just getting a job and are first saving up because they’re fighting a higher cost of living and they’re fighting fighting a rising cost of living thanks to the Fed so we’d junk the two percent inflation target and I would start raising short term interest rates I would do it slow because I don’t want to blow anything up but at least I would start doing it then the question is okay at what level would you raise interest rates too and over time I don’t I think negative real interest rates is the architect of boom and busts it’s the architect of excessive credit growth excessive debt so over time I would say we are going to try to keep overnight rate at around the level of inflation now ideally I wouldn’t even be in the business of setting the Fed funds rate I would let the market set the low level of interest rates who am I who am I to think that I know on a daily basis what the right interest rates should be I cannot be never again to think that what why do we have the Fed in the first place exactly that to your point wouldn’t the market come up with a much better you know we always marvel at the super computer of finding that the the market the market is you know we have this price information that’s perfectly distributed why isn’t them why don’t we use the market for this I never understood that part well that’s right the market the beauty of the market is the market got things wrong gets things wrong all the time but what the market is able to do is is that when it gets something wrong it quickly adjusts and having the ability to quickly adjust allows us to fix things that that go off kilter via the market but most of the time markets constantly because of that readjustment gets things a lot more right than wrong as opposed to the thinking that I can price fix the cost of money at the right level without any unintended consequences only seen that that has obviously gotten very wrong but yeah that’s that that would be part of of this transition is getting out of set of the setting the Fed funds rate and just say okay maybe the Fed if there even is a central bank is to say okay I’m just going to be the lender of last resort at the discount rate which supposed to be a punitive rate with collateral and you’ll sort of fill that role but certainly not in pricing the most important price out there that being the cost of money that is when things certainly have gone very much awry one thing that I guess a lot of people would say immediately is well if you do this and you have other central banks in the world who are officially lower their interest rates and their currencies right so the dollar would jump to twice the value and basically our exports would fall of a cliff because it would happen like Switzerland right it has an artificially too expensive currency because of the euro and Switzerland for a long time it still is very concerned that this basically destroys their economy and they have they have literally nothing left that’s competitive to export and as long as other countries manipulate their currency so much what what are we to do about it we basically have to copy this this negative ways to to make your currency artificially cheaper until everyone one day stops right but for that until that point we have to compete with them because of that we have to make it as cheap as all the others it is a great question we obviously are not an island unto ourselves but I like to look at look at Japan look at the yen for example it’s not just the level of interest rates that determine the level of your currency it’s not just the amount of money printing I mean when you look at the bank of Japan where they own about half the ggb market their balance sheet is 130 percent of gdp they’ve had rates essentially at or near zero now negative for almost seemingly decades and the yen really at least against the dollar has really just kind of flat line over the last bunch of years you think that the yen would have gone the way of this in bob way currency considering what the bank of japan has done so it’s not just about interest rates and you look at the u.s. exports are are only about 10 percent of of the u.s. economy or actually you know total trade so if anything we are a consumer dependent economy a strong currency would actually help a consumer driven economy because it would raise our purchasing power so I don’t think a strong dollar would necessarily have a negative impact in the u.s. economy now I’m not looking for a strong dollar per se to me what’s best is stable currencies but to your point about well if if they have negative interest rates and all this QE and they’re trying to suppress their currency what does that mean well look at the euro the euro they have negative interest rates it’s all the way out market driven out to you know 10 plus years in certain countries and the euro hangs in great against the dollar when when you’re from the now no question that the ECB was successful in lowering the euro from about 140 to as low as 105 via their their policies but after continuing it and ramping it up euro hasn’t broken so it’s more than just the currency it’s also deficits it’s also where’s your current account deficit we have a large current account deficit out there we have record trade deficits as a piece of that we have exploding budget deficits well europe has a current account surplus uh japan its current account surplus china’s current account surplus so uh we we would still we would still possibly have these uh even with with with a bounce in the dollar uh now i would hope that if i was chairman of the fed and i started to implement these policies that that maybe some of these other countries would would learn lessons and maybe follow as opposed to just staying where they are but you know we’re we’re getting back to the example of of that runaway freight train i mean you look at europe how is europe going to ever get out of negative interest rates without blowing up the european bond market i mean just just taking their their deposit rate from minus 50 to 0 would would would have would evaporate you know trillions of dollars of losses for all the people that that own these bonds on a mark to market basis but or is europe just going to be in negative interest rates for ever i grew up in germany and from what is my gut feeling and that’s obviously just an observation is that the current structure of the european union won’t survive this as you say coming out of negative interest rates if you really try to what’s going to happen there is that these economies will go their own way and we know where germany will go you know it’s a very hard currency and they’re still able to compete with this they have actually shown that they can get one of the hardest currencies for 20 30 years and we’re still able to run a surplus in their exports however but most of the economies in europe don’t have that idea and they don’t not ready to compete that way and i think we we see this already that they’re being dragged down by the by the policy that basically germany and then the way germany runs their economy it has created a lot of trouble on all the peripheral places in the european union and now there will be more than one one greeks right it will be spain there will be italy and sooner or later they split apart and i think then they solve that problem right so japan’s not japan italy’s rate will go back to 10 where it used to be historically and maybe eight percent for spain i think that would be my most likely scenario yeah i i struggle with that because i think on paper the euro was a good concept i mean here you have all these countries that have this tremendous amount of trade together and how great would it be if we just had one currency we wouldn’t have to worry about currency fluctuations on a daily basis by doing business together so i think on paper it it made a lot of sense i think where it went awry i call it german imperialism though when you think of it it really exaggerates german strength and makes it harder for everyone else to catch up well there is a chance maybe it’s a globe it’s a it’s a big or domestic market but look at it how historically german companies were able to exploit such markets and spanish companies rarely had that opportunity or had the ability let’s put it this way maybe the opportunity that was plenty but not the ability so i felt there’s a bit bit of economic german imperialism sooner later will fall apart right i create a tons of infrastructure right so that it goes both ways yeah i i i agree with that because it took away the ability of spain and greece and really to devalue their currency to better compete against and against germany uh but over time relying on currency devaluation is not really the best way of of of of growing your economy on a real basis and and growing the standard of living and the quality of life of your people constantly devalue your currency i hope the fact gets this message one day so well unfortunately um yeah i was i was i thought that after uh the financial crisis uh driven by having low rates for too long was a lesson to be learned but rather than learning that lesson uh the fed thought that maybe they didn’t do they they weren’t easy enough and they just they continue center banks just keep doubling down on the same policy expecting eventually different result and what happens is they keep digging a hole deeper and deeper and deeper to the point where the rope is not long enough to pull them out and uh i think that that’s the situation that we’re in right now one other opportunity to solve this quandary a lot of people put forward to say well this time technology is different right so we will see not just the rise of technology we know what ai is capable of we don’t know if it’s going to materialize its way but it can grow gdp by by several hundred percent easily in the next 20 years if only one of those scenarios comes through so a lot of people argue well technology this time is different because a it’s bigger than ever before we hear the vertical singularity and b most of the growth will actually be where the data scientists are will be more likely in the developed economies so developed economies will grow stronger six seven eight nine percent growth developing economies will lag behind do you think that’s a scenario you you share because i’m getting drawn to this instinctively i don’t have a ton of good data for it well let’s look at growth to begin with it’s populate it’s the size of your labor force your growth your labor force plus productivity so basically what that is implying is that productivity growth will accelerate with a lot of this technology but my viewpoint on technology is it’s not a it’s not revolutionary it’s evolutionary like i said earlier in this interview we’ve been seeing forms of technology in the hit since the the history of mankind we’ve seen technology of all different kinds and just over the last hundred years you know we had the car that that replaced the the buggy whip and we had the radio and then we had the tv and we had the telephone i mean when you think about the telephone you think the greatest invention of all time or the airplane where you can get from point a to point b and and i mean that just unbelievable and and wow car replacing the worst in buggy just technology is it just it always happens and so every new form of technology is just building on what came before it so is it going to make us more productive well the productivity numbers in the us over the last 10 years have been pretty pathetic with incredible companies making our lives seemingly more productive but it’s it’s a question of how you define productivity is is facebook and spending two hours like checking out you know your friends instagram pictures is that productive not really is me being able to go into google and search something up and getting an answer rather quickly yeah that can that’s pretty productive but you know me shopping on online yeah that’s pretty productive because i saved myself a trip to the store but in in the aggregate um yeah i think will be more productive in from a technology perspective but in the aggregate i don’t know if we’re going to see uh in acceleration more than what we’ve already seen uh because getting back to the fed we we have a lot of drags on productivity talk about the government the government creates a lot of drags on productivity let’s take the banking sector post financial crisis i think there’s about 30 000 compliance people that work for jp morgan compliance people are not productive but they tell you otherwise yeah tens of thousands now work at jp morgan let alone the tens of thousands that work at all these other banks just to deal with the you know the regulatory laws that are on the books post financial crisis uh central bank policy creates a lot of zombie companies uh that everyone gets to live another day through easy money well a lot of zombie companies uh create a lot of un productivity uh because capital is not going to its best uses and companies the good ones aren’t as profitable as they should be and are therefore less productive so if the private economy was left to its own devices i would say yeah we can see an acceleration of productivity but uh there are drags on it uh through central bank policy and government regulation whether you whether you agree with it or not it’s still it’s still a fact no i i i’m with you what a lot of people put forward that peter deal has recently also i think argued this way is that he was initially pointing this out there’s been a bunch of white papers we had this very low productivity growth that started to decline in the 70s it was really strong the 50 60 70s early 70s and maybe we are now reversing to the meme and that could be the next 20 years and that would push us quite nicely if it’s enough it’s a good question so we all hope i guess yeah and we we we can consider all this money that we are printing is basically loan to ourselves to make ourselves more productive will it happen nobody knows right we know afterwards that’s always the problem but that’s what a loan is a loan is just allowing you to do something today that you would have done tomorrow yeah but this could when i when i say i get it i invented creative device and do it today it’s better than i went then compared to me invented it in 20 years from now when i have the money finally for this you’re for sure enough money um well a lot of people also say this inflation is basically the easiest way for us to increase taxes because u.s with all its troubles to bring a higher tax rate the question there but say our tax rate is internationally pretty competitive it’s not as good as say eastern europe but it’s much better than western europe for instance or japan we use inflation as a as a throwaway tax rate that we can easily steer do you concord with this well inflation as a tax is not something that that government directly collects you mentioned you know the corporate tax rate you know at least in the u.s we like to look at the federal corporate tax rate but every state also has corporate tax rates so you really need to look at the state and the federal corporate tax rate and the u.s even with the with the cut down to 21 percent is still very much middle of the road when you look at you know effective tax rates uh you know i know i know there’s a big discussion now on on raising the corporate income tax rate but at the end of the day it’s not really companies that pay that pay it directly but it’s really the rest of us that pay the corporate income tax rate because it means either lower wages or higher prices to their consumer so that’s who really pays the corporate income tax rate and inflation it ends up being those that are least able to afford it ends up getting impacted the most through higher inflation i mean inflation is a tax just anytime you hear inflation anytime you hear the fed saying we want a two percent inflation that means they want a higher tax on you they want a higher cost of living on you uh so i think people need to uh put that into context if you look out and see all our problems that we have here undoubtedly what countries come to mind where you feel like well they didn’t have their shit together they know what they’re doing they have learned over time and they they’re maybe in a different phase of this death cycle i know redal you call it a big cycle and we’re probably at the end of it well what countries should we look at that nobody are doing uh that’s a tough question uh because knowing what they’re doing is can be very subjective uh i mean if you just look at like economic policy i mean i think the best economic policy is is stable policy where business i will say no policy right uh that at least know like what the playing field is so to speak in a competitive fashion competitive in terms of regulatory structure competitive in terms of attack structure and i like to look at singapore now singapore is a country of only seven million people i know you interviewed jim rodgers who lives there but there’s a level of stability there on the corporate side and the individual side that creates a a background for economic growth uh you look at south korea but it’s essentially a socialist country a lot people don’t know that so there’s socialized housing the currency is being messed up all the time that’s why your question was very subjective because no country uh in the aggregate does it you know there’s no libertarian utopia out there it doesn’t exist it’s just it’s a matter of degree in between that utopia and full on north korean cuban communism everybody else is just in the middle so your question is basically who’s close who’s on one end of the spectrum relative to the others and um there’s no one really that close to that end of the spectrum now hong kong you could have argued before china essentially took them over in many ways you know was closer in terms of having a low tax rate on the individual side the corporate side the capital gains side where i don’t even know if there is a capital gains tax in hong kong and and look at the development of hong kong over the past 30 years look at the development of soul korea over the past 50 years relative to north korea so it’s really just a matter of degree but uh you know there’s no libertarian utopia where there’s sort of this doing it right type uh environment yeah i always wonder about this because obviously being libertarian and leaning towards this is very popular the last 10 years for good reasons right i i i fully agree with some of the the the points that libertarians make but i feel like the problem with that is that if if you end up in this anarcho capitalism so this big right that’s like one extreme of libertarianism it’s obviously very far out you kind of end up like like many countries in africa right but where there is supposedly the certain kind of state system in place but it’s basically all diverse right it doesn’t really exist there’s tribes there’s people who do whatever they want there’s a lot of individual freedom which is great on the ground but there isn’t much of real corporation corporation societal corporation is very low so competition is certainly there but there is it everyone ends up with the law productivity then they should have let’s put it this way and so look the country looks that way too from my point of view well in africa there’s also an enormous amount of corruption uh if you want some i mean that that that’s just part of their their economy many of the countries there just part of those china and china is taking off like like never before right but if there’s there’s the getting back to the good degree thing there’s a degree of corruption it seems like in many african countries the only way to do business is through corruption and and and is to bribe the local official if you want that permit and uh it seemed like that that’s just part of the culture and that that certainly doesn’t lead to productive productivity and productive growth because the the the business doesn’t go to the the best operators it goes to who can bribe the officials the most yeah yeah that’s certainly one aspect of it um you you also were and correctly if that’s wrong you you were definitely bullish and you probably still are on gold and silver they both haven’t done so well lately in the last six months so to speak why if we we all acknowledge that inflectation inspections or fears have definitely tripped up why hasn’t that impacted gold and silver well with with full context in 2020 silver was up 42% and gold was up 25% and they were up even more than that into last august highs when gold got above 2000 at a record high and silver got close to you know around $30 an ounce so with that backdrop we’ve seen of course a pullback because we’ve seen a modest rise in real rates and we’ve seen a slight bounce in the dollar and then we’ve also had bitcoin you know sucking a lot of oxygen out of the precious metal room now i’m not i’m not a believer of this either or that some people like to say it’s gotta be bitcoin it’s gonna take away from gold and silver they can all complement each other just as a tech investor is not saying should i buy facebook or google they buy both and they’re not saying shall buy one sending conductor and not the other they buy both and fang is not just picking one of the letters and buying it you buy it all and if gold and silver are going up for for a reason that bitcoin shares then they can all go up and i i i think that that will eventually be the case where they’ll they’ll trade together because they’re they’re responding to the same macro factors but at least for the last six months gold and silver have really traded off the real rate direct move and the currency move where bitcoin has just you know been a a cult it’s funny i laugh when uh people would look down and say you’re a gold blog bug and that would be looked down upon but you know we’re we’re now filled in world with bitcoin bugs and that’s just that’s now a badge of honor uh i’m fine with bitcoin i i i respect it and and i think that it has its place uh in a world of of what we talked about zero rates negative rates money printing and so on but it’s not the only asset that has a limited supply gold the discovery of gold is going up only about two percent a year which is pretty much what the supply of bitcoin is now bitcoin will be capped at some point but that’s not for a while down the road a baseball card printed in 1968 is is of limited supply they’re not making any more there’s only a finite amount out there and there’s even a smaller amount out there that is in high condition so bitcoin is not again not the only uh limited supply of of of something that can be considered a hard asset even though it’s obvious more it’s digital and it’s not physical it seems like bitcoin could be replaced by just another coin i think you mentioned it on another podcast like the next day there was this whole debate about dodge con which has shares a lot of similarities to the early bitcoin movement and it could become the next bitcoin tomorrow people argue one one thing that i was curious with bitcoin is how much higher can it go so we know the market caps of gold is pretty high right of all the gold that we know in this world how much when we apply a similar sentence say oh it could be maybe half the size of gold did you run the calculations how many times can we see doubling of of bitcoin is five times ten times well i mean i think that you’re making the right calculation in the sense that the the bitcoin bulls they say that it should be half of the market cap of gold or a full market cap but you know the one issue with that calculation is is that one of the biggest holders in the world of of gold is our central banks and it’s used as as a reserve uh that they hold and unless bitcoin can can establish that sort of presence i don’t i don’t get the the calculation of of making it a percentage of of gold because gold has that that usage so but we’ll see i mean bitcoin can go much higher it’s it’s throwing a dart i mean that’s the thing with bitcoin but you can also make the claim of gold is that when people ask me what i think of bitcoin i think you know bitcoin can be here forever i just don’t know where it should be priced uh should it be fifty thousand five hundred thousand five million or should it be fifty bucks i don’t know when we get to twenty one million coins at some point in the in the far away future uh and it just trades like anything else it’s got it’s it can trade like a closed end fund it like a closed end fund of anything there’s a finite amount of shares outstanding and it just trades wherever uh reminds me of two thousand when i when i spoke to people there and i asked them so where should yahoo trade and they’re like i really don’t know it could be like a hundred thousand or it could be bankrupt tomorrow i’m like okay that was very helpful right but there is much not much you can do right once we in this bull runs there’s not much you can do to predict that unless you really predict the day by day or week by week right we know it’s a lot easier to try to predict the valuation of a cashflow generating entity a cashflow generating business where you can at least model that out uh trying to figure out what the price of a gold coin is or a bitcoin is or a baseball card or a piece of art you know a lot of times is a lot more subjective and is a lot more determined by just what the state of mind is on that particular debt between buyer and seller but i know your time is valuable and you gotta go i have one last question for you when would we take all of this into account and the view that you share that talked about on a macroeconomic view what would you invest the individual what would you an individual investor what would you suggest they position themselves but is it more gold is it more silver is a bitcoin how adventurous and how bullish should people be at this point well i i think from a evaluation perspective it’s hard to find cheap assets and it’s uh they’re out there but it’s harder of course i managed two portfolios for clients one in particular is global macro so to sort of answer that question i do think an allocation to gold and silver is is is definitely prudent we don’t own bitcoin for clients we let clients make that choice themselves uh for some right now regulatory reasons but that will change at some point but i still don’t know whether um i’m going to have that as part of my portfolio right now i’m comfortable gold and silver uh sort of capturing of that monetary asset uh i am bullish on this i just want to just want to add tons of ETFs right there’s easy to invest into these days you don’t have to actually buy physical gold unless you really want for sure uh i’m bullish on agriculture stocks energy stocks industrial metals particularly copper uranium i’m actually very bullish on and looking out over time you know one of the key pieces of one’s investing success is time horizon those that have a lot a large long term time horizon can better block out a lot of short term noise and can better weather volatility that always comes with markets and when i look out over the next 10 years and i say where we’re in the world am i going to get some good return and i know i keep drawing myself to asian markets uh last 10 years it’s been the us market that’s been the dominant international market in terms of returns and i think it’s going to be asia i’m looking at over the next 10 years over this china india i mentioned singapore south korea indonesia taiwan uh this is where i want to have uh exposure to vietnam uh another one so i’m very bullish on on asian i have a decent position in not just some country etfs covering these these these countries but also individual companies that will also benefit i’m also bullish on travel i think that covet was just a temporary factor impacting travel but leisure travel is an unstoppable force as the world ages as we see a growing middle class in in the merging world where these where a lot of people want to travel more and they want to see parts of the world i think that is an unstoppable trend so asian related equities i think with an asian focus i think is very attractive a lot of the leisure and hospitality at least in the us have obviously had this very short rebound with you know with with the with the vaccine rollout so i think a lot of those stocks have already braced in a lot of the the good news now um and then uh so i so i say i guess the bottom line the the portfolio exposure it’s inflation exposure metals commodities their value stocks that that that i that i like um that i don’t believe are value traps at least i hope they’re not and having i don’t hear any tech in your portfolio correct uh no not now um to me tech uh you know tech is obviously a lot within that word but uh tech is not where the value is and i’m more of a value investor and i think the the returns for tech well the companies will do fine i think a lot of the valuations have discounted a lot of it that that that good news so i’d rather buy tech on on on cheaper valuations which i think we’ll get at one at some point as we always do but at least not yet yeah well with this positive note Peter thanks for doing this really appreciate your coming on it’s awesome thanks i i really appreciate having me on all right take it easy talk to you thank you so much talk to you bye bye