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GARY BRODE | From Deep Knowledge Investing

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How has the US dollar lost 94% of its value since 1800? Gary Brode from Deep Knowledge Investing

I can't believe it's been over a year since I've had Gary on the podcast. It's been great to catch up with him and to keep following his thoughts on his twitter feed. He always takes a clear position, explaining his reasoning and taking the risk of being wrong.

In this episode we spoke about the outcome of the mid-term elections, US energy policy, inflation, and what a sovereign debt default looks like.

"All fiat currency goes to zero, always, right? The Roman empire fell, their currency became worthless. The Spanish empire fell, their currency became worthless. The British Empire hasn't completely disappeared, but in the last 350 years, the purchasing power of the British pound has declined by 99.5%. The US dollar right now is the world's reserve currency. That currency has lost 94% of its value since 1800. And the official number this year will probably show a loss of purchasing power of 7-8%. What we have is a situation where all fiat currency goes to zero."

He believes that investors need to be endlessly creative in how they approach markets. His reaction to high energy prices is not to get mad but to get investing.

"I get my electric bill and it makes me mad and I go fill up my car with gas and it makes me mad and I get my heating oil bill and none of that is pleasant. So my response is, okay, well I'm gonna own the energy companies. And so one of the things I would encourage your listeners to think about is there are always solutions. There are always answers to these things. Not everything that happens in life will be good. You won't agree with all of it, but there's always a way around it. There's always a way to be creative to make money from it."

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Chloe (1s):
Stocks for Beginners.

Gary Brode (4s):
When people don't explain their reasoning, it's possible for them to say these cryptic things. Say, I meant it. I didn't mean it. You misunderstood. Okay, enough. Give me, I think stocks are going up because, and then explain your reasoning. Right. I think this stock is going down because explain your reasoning. And once you do that, it's impossible to do the brokers trick of telling half the people, it's going up. Half the people, it's going down. Okay. We were right. See, we're geniuses. We were wrong. We were kidding. We didn't mean it. I I have no time or patience.

Phil Muscatello (37s):
Hi, and welcome back to Stocks for Beginners. I'm Phil Muscatello. How much debt is the world in right now? Are some countries doing better or worse? And has anything changed since the midterm elections? It's my pleasure to welcome back to the microphone, Gary Brode from Deep Knowledge Investing. Hi Gary.

Gary Brode (56s):
Hi Phil. Thanks for having me again. Great to be speaking with you.

Phil Muscatello (58s):
Ah, thanks for coming back on. Now, Gary spent 30 years in the securities industry. Most recently he was managing partner and senior portfolio manager for Silver Arrow Investment Management, but now with Deep Knowledge investing. So let's start by talking about the election roundup. And we're recording on Tuesday the 15th of November. So we don't know what the actual result is just yet. What's the election look like to You?

Gary Brode (1m 23s):
Thanks. It's a great question. The obvious is the red wave that people were talking about didn't materialize. As of now, it looks like the Republicans are going to have control of the house and won't have control of the Senate. The senate's gonna be 50 50 or you know, 51 49 probably for the Democrats. So the Republicans will have more control than they did going into the election, but not as much as they had hoped. I, I would make two key points on this one, this thing that we have with unsecured mailin ballots. And you know, here we are a week later and they're still counting.

Gary Brode (2m 3s):
And we don't know, none of this is good for the process. It's not good for democracy. I don't care. You know, if you're listening to this, I don't care which side of the aisle that you're on, but let's just go back. Over the last 22 years, the Democrats contested the 2000 presidential election, the 2004 presidential election, the 2016 presidential election, Republicans contested the 2020 election and didn't think that was done. Well, you know, there are all kinds of allegations about improper procedures here in 2022. And so, you know, whether you're on the left or the right, whether you're a Democrat or Republican, chances are at some point in the last 20 years you've said, wait, this election is being stolen.

Gary Brode (2m 47s):
I don't accept the results. And that's a problem. And it's particularly one of the things creating that problem is we went from, when I was a kid, we would, we'd have election night, everybody voted same day, day except maybe the military and a few people who were disabled or traveling and votes got counted that night. And you knew by the time you went to bed what the results were. And we had that technology through the seventies, eighties, nineties. Now all of a sudden we're, we're a week later and we still don't know. And I get it, you know, George is going to run off, that's fine. But I, I think in terms of reassuring the American people that elections are fair and properly respect the will of the people, we gotta sort out the procedures.

Gary Brode (3m 29s):
We need to know really on election night, who's won. And there need to be good reasons for the mailin balloting because this thing where every two to four years, half the country thinks they, their election got stolen or the other side isn't playing for it. That's, that's not good for anyone. The final thing I would say is right or wrong, the election was viewed as a victory for Democrats and for the White House. And it's not that they had a great night, it's they had a great night versus expectations, which is reasonable and fair. So they lost seeds, but not as many as they had hoped to. And so you had, you know, Joe Biden, who, you know, he, he came out recently and said, you know, he's gonna be selling oil from the strategic petroleum reserve at 90.

Gary Brode (4m 16s):
He's setting a $70 floor. He is gonna buy oil at 70. First of all, I don't think anyone in the White House knows how difficult it is to trade commodities. And I'm a hundred percent certain there's no one in that building with the expertise to do it properly. That said, the commodity trader in chief came out the day before the election and he said, we are going to shut down the fossil fuel business. And then he came out the day after the election and said, Hey, you know, we had a good night. I'm taking this as validation of my policy. So more of the same. We're not changing a thing. And so, you know, my response to that is, okay, you know, fine. But if we're not going to permit land, if we're not gonna drill, if we're not going to produce the energy the country needs, then I wanna own the existing production.

Gary Brode (5m 4s):
I wanna own the places where there are permitted wells, where there's, you know, lng, liquid natural gas production, you wanna own the refiners. Basically what we're looking at is two more years of insanely high energy prices. And so, you know, my response is whether you like the policy or not, I, I wanna own energy here.

Phil Muscatello (5m 27s):
So there's this dynamic going on at the moment about energy that fossil fuel production needs to be shut down. Has this been driving inflation up until this point? Because a lot of the, the words that come out of the White House seem to be suggesting it's just about the Ukraine war. It's not about their, their own policies.

Gary Brode (5m 43s):
The fact is, energy prices, gasoline prices were spiking while ahead of Russia going into Ukraine. The second thing is, Russia's still producing oil and gas, right? They're, they're just not distributing it to Europe. And that's not as efficient, obviously there's, there's nothing more efficient than a pipeline and you end up with issues when you reroute supply lines. You can end up with issues on refining. But the fact is, these issues existed in energy prices before Russia went into Ukraine, and Russia's still producing oil and gas. The other thing that we're seeing here in the United States is one of the reasons why gasoline prices are so high is because of what we call crack spreads, right?

Gary Brode (6m 32s):
That what we're short on oil, but we're really short on refining capacity. And so crack spreads, which is basically the amount of money that the refiners make to turn raw commodities into distillate like gasoline or, you know, airplane fuel or diesel, those spreads quadrupled this year. And so some huge part of what we're seeing is a result of too little refining capacity. And nobody's built a refinery in the United States in decades because that's a multi-billion dollar multi-year project. And so, Phil, let me ask you, if you were a US refinery and you're making a ton of money because demand is off the charts high, but everybody, you know, the, the commodity trader in chief is saying, we wanna close down your business.

Gary Brode (7m 24s):
We wanna shut you down. We wanna make sure nobody's producing fossil fuels by 2035, or, you know, whatever this week's date is, would you build a multi-billion dollar multi-year refinery?

Phil Muscatello (7m 36s):
It doesn't sound like certainty to me.

Gary Brode (7m 39s):
Right? And, you know, we, we end up with these ridiculous supply demand issues. And so, you know, the White House recently, they were angry at the oil companies for not producing more, leaving aside the fact that they haven't permitted more land for drilling. Okay, fine. But, you know, they ran for office saying, we're going to close down this business, and then said, we're angry that you're not producing more and it's your fault that prices are too high. But again, you know why, if you were a US producer, why, why would you be investing in that when the people in charge are flat out telling you, we wanna put you out of business?

Phil Muscatello (8m 19s):
Haven't they also been talking to the Saudis and to Venezuela to sort of reduce sanctions perhaps and try and thaw relations just so that they can get more oil imported?

Gary Brode (8m 31s):
Yes. They, so the White House has gone with a three-part strategy. The first was to ask the Saudis in OPEC to produce more, and they came back and they realized it was a, an election ploy. And they said, not only are we not going to produce more, we're cutting production by 2 million barrels a day. So that, you know, that resulted in a quick no. And then the White House went to Iran and to Venezuela and said, Hey, can you guys produce more? We'll lift sanctions, we'll make life easier for you. And I'm looking at this thinking, what, what in the world we're, so we're going to terrorists, dictatorships, communist dictatorships, we're going to opec, we have plenty of oil, we have an enormous amount of production capacity, great technology here, and we're trying to shut down US based drilling and refineries while trying to send money to Iran, Saudi Arabia, and Venezuela.

Gary Brode (9m 31s):
I mean, it's, it's, this is completely insane. And on top of that, at the same time that the White House is saying to the US oil companies, we want you to produce more. They're saying, we're also considering windfall profit taxes. So Phil, you know, quick economics quiz for you, if somebody says, Hey, I'd like you to produce more, but just so you know, while you're in the middle of ramping up that production, we may come up with a whole bunch of insane unexpected taxes, windfall private taxes. We wanna make sure you don't really make a lot of money from this. Phil, are are you gonna start drilling? Are you going to invest in, in that infrastructure?

Phil Muscatello (10m 10s):
That's a wild situation, isn't it? What do you think the long term future is for energy prices and then of course the effect on equity markets?

Gary Brode (10m 18s):
Yeah, so that's a great question. The effect on the equity markets is no longer what it used to be. So if you go back to like the seventies, early eighties, I think energy made up something like 30% of the s and p 500. Now it's something like 3%. And for, you know, for everyone listening to this who's been frustrated by high electric bills, you know, by huge expenses to put gas in your car or you know, all kinds of other very expensive inconveniences and, and hardship that people have had because energy costs are so high. One of the ways that we deal with that is you might as well own the other side of it, right?

Gary Brode (11m 0s):
So I get my electric bill and it makes me mad and I go fill up my car with gas and it makes me mad and I get the, you know, my heating oil bill and none of that is pleasant. So my response is, okay, well I'm gonna own the energy companies, I'm gonna own the companies. I'll at least sell myself the oil that inflated prices. And so one of the things I would encourage your listeners to do, or just to think about is there are always solutions. There are always answers to these things. Not everything that happens in life will be good. You won't agree with all of it, but there's always a way around it. There's always a way to be creative to make money from it. And it's, you know, it's the same thing. Earlier in this conversation you were asking me about politics and about elections and you know, half the country likes the results, half the country doesn't like the results.

Gary Brode (11m 48s):
That's fine. You know, don't spend a lot of time being upset about it. Figure, okay, if these people are the ones in charge, what policies are they gonna pursue? If they pursue those policies? What stocks are gonna benefit or get heard? And just find a way to make money from it. And our view is that we should be endlessly creative, flexible, adaptable, you know, roll the changes and figure out what do we do now. And it's the same thing with fuel. The prices are bad, but they're not going to get better because for things to get better, you'd really need an increase in energy production. And somebody tell me where that's coming from

Phil Muscatello (12m 29s):
And something else that you've been writing about and following you on Twitter is always good. So I'd encourage everyone to follow Gary on Twitter and read some, some of his material. And that's about the, the effects of ultra low interest rates. Tell us about

Gary Brode (12m 46s):
That. Yeah, and and thanks for the, the pitch there Phil. It's Gary underscore brode on Twitter. Would love to have your audience there as well.

Phil Muscatello (12m 55s):
Oh, we'll, we'll be putting that in the episode notes as well so people can ah, terrific. People can lurk and find you and start stalking you.

Gary Brode (13m 2s):
I appreciate it. Thanks. So you're talking about ultra low interest rates and it creates a few problems, right? One is you have a huge misallocation of capital and a lot of people don't really think they think about interest rates as well. You know, that's what you pay on your credit card or that's what you pay on your mortgage and it's just sort of this thing that exists. So let's just take a minute everybody and, and take a step back and think about what does interest really mean? And it's how the financial market set the price of risk and the price of time, right? Like really think about a big picture. It's the price of risk in time and normally the market sets that rate and that would be the right way to do it.

Gary Brode (13m 47s):
Now what we have is groups of worldwide unelected bureaucrats who have never held a job doing that. And take a look, you know, the Federal Reserve, it's populated by people I'm sure with very high IQs, but none of them have ever run a business. So you end up with, with allocations of capital that are not ideal and projects get funded, that shouldn't be funded because people are desperate to do anything to earn a return on capital. And you know, there's an old saying that, you know, and, and I forget, it's, it's, it's a British saying, and I forget who the standard hypothetical British person is, but in the United States we call him Joe six pack.

Gary Brode (14m 29s):
And the old expression is, you know, Joe six pack can handle anything, but he can't handle 2%. And the point is, if interest rates drop below a certain point, usually around 2 3%, people will start looking for crazy things to do with their money. You know, if people can earn 5, 6% in a savings account, they'll say, okay, you know, my money can compound, I'm mri. And so you have this, this crazy misallocation of capital in businesses that shouldn't get funded do and it soaks up capital. We also see it in terms of zombie companies and government debt as well. And so, you know, imagine for a minute that, you know, you and I are running a government and let's say, you know, we're able, we've got our own federal reserve, our own central bank.

Gary Brode (15m 18s):
And so Phil, you and I say, well, what, you know, what do you think the rate of interest should be? And we say, oh zero, let's not pay any interest. And somehow the bond markets accept that. So how much debt do you want to issue so that we can give everybody free stuff, a million dollars, a billion dollars, a trillion dollars, $10 trillion, right? The answer is we don't have to pay interest on it. So let's run up the credit card. It's not costing us anything. It won't screw up our budget. And so you have these, you have governments taking on massive amounts of debt. Well, the problem is now we're at the inflationary part of the cycle, and the way these same central banks deal with that is they increase interest rates and this is what we're seeing now.

Gary Brode (16m 1s):
And all of a sudden it becomes a really big deal when you know, your on balance sheet debt is $31 trillion, or when your Japan and your debt is 260% of gdp. Now all of a sudden when that debt reprices, it's gonna blow a hole in your budget. And that is a huge problem. And so when people look at Jerome Powell, the current chairman of the Fed, and he views Paul Volker as the sort of the model to look at here, but Volker was able to raise interest rates so much because the debt the United States had back in 1979 wasn't that high. But now, you know, you, you start to raise interest rates and you blow a hole through the budget.

Gary Brode (16m 41s):
And we're right around the point where when US debt reprices, all tax receipts are going to be going to interest on the debt. And so there goes all of your other spending. And where we are is at a point where we're either going to need to have a stealth default where we don't pay people what we've promised, we'll pay them, you know, and, and default. Or alternatively, we have huge inflation and we pay people back in dollars that aren't worth very much. Or we're, I think what we're gonna have is a situation where we're gonna have to print dollars in order to pay our interest, and that's gonna lead to more inflation, which will lead to higher rates.

Gary Brode (17m 23s):
And that's what what we get to the thing we call a, a death spiral.

Phil Muscatello (17m 28s):
Just earlier in that answer, you kind of referred to risk and how interest rates are, how the market prices risk. And a lot of people don't understand that the value of equities especially are measured against the risk free rate. And that sounds very complicated, doesn't it? But really it's all about what is the price of money and then how do you value a stock or a company above that rate. Can you just talk a little bit about that just so listeners are clear about how that works?

Gary Brode (18m 1s):
Sure. You have it exactly right.

Phil Muscatello (18m 2s):
And did I get, and did I get that right as well?

Gary Brode (18m 4s):
You nailed it. You nailed it. Okay, good. You know, we

Phil Muscatello (18m 8s):
Wrote my studies, my study's paying off.

Gary Brode (18m 9s):
I right, you're, you're, you're gonna pass the licensing exam. We wrote an article on this earlier this year, and one of the questions we were getting from people is, okay, interest rates are going up, we get it. That affects the stock market. Liquidity money's being pulled out of the system with less money chasing stocks. You know, you end up with this deflationary credit cycle. It's basically a way of saying we're contracting the money supply as interest rates go up. Okay, fine. But I was getting these questions from people, why, you know, why is the s and p 500 down 20% in the NASDAQs down 30%? And if you look at, you know, the really big NASDAQ companies, a lot of like the high flying tech companies, a lot of those stocks were down 60, 70, 80, some even more than 90%, right?

Gary Brode (18m 59s):
I mean, I think what's Facebook down this year? Something like 70%,

Phil Muscatello (19m 2s):
75% I think. Yeah,

Gary Brode (19m 4s):
Yeah. Or meta now. So people have asked me about that and, and here's the reason for that. It has to do with duration. And that's, that's just a fancy way of talking about the timeframe for an investment. So, you know, Phil, let's imagine I owe you a hundred dollars, right? And I say, I'm gonna pay that back to you tomorrow. And you think, okay, whatever, just pay me the hundred dollars tomorrow. If I say I'm gonna pay you that hundred dollars in a year. So the duration of our agreement is a year. You might say, yeah, Gary, why don't you pay me a few percent interest and say, okay, Phil, that's fine. But if I say to you, Phil, don't worry, I'll pay you back the hundred dollars in 10 years, right?

Gary Brode (19m 48s):
That, that's a 10 year duration and having higher interest rates is going to massively change the value of what's owed. So it's the same thing with these big high growth tech companies. They don't necessarily have a lot of earnings right now, or a lot of free cash flow right now. You're buying them because they have huge growth and you're thinking 5, 10, 15 years down the road, there are going to be, there's gonna be a lot of earnings and cash flow then. So just like as we extend the duration of the a hundred dollars that I owe you, I owe you more. It's the same thing with these companies. If you're going to get a hundred dollars of cash flow, you know, from one of these companies 10 years in the future, as interest rates go up, the present value of that drops, basically the high growth tech companies are long duration assets and that makes them more interest rate sensitive.

Gary Brode (20m 42s):
And that's, that's really all it is.

Phil Muscatello (20m 45s):
So you also mentioned sovereign debt. What is sovereign debt and why are we looking at a default on sovereign debt? Yeah,

Gary Brode (20m 53s):
So

Phil Muscatello (20m 53s):
Just go back to first principles. What, what is sovereign debt,

Gary Brode (20m 56s):
Right? Yeah, I I get it. You start talking about sovereign debt and people's eyes glaze over, they say, oh my god, I don't know what they're talking about. Okay, we can make this really simple for people. Everyone who's listening sovereign debt is simply debt that is owed by the government. So if I owe you money, it's Gary brode debt, if Phil owes you money. It's Phil Muscatello debt. If you owe money to your bank, it's a mortgage. And if the person who owes you money, the entity that owes you money at the end of the life of a bond is a government like the United States government, our treasury bills or the UK government, they have what they call guilts.

Gary Brode (21m 35s):
The Japanese have their bonds. The European Central Bank has EU bonds. When the payer, the person who owes the entity that owes is a government, it's called sovereign debt. It's really just a fancy way of saying government denominated debt and that it will, will do a little more. First principles and financial vocabulary. That debt is paid in fiat currency, which is just a fancy way of saying currency issued by a government. Now here in the United States, that's the US dollar and the dollar used to be backed by gold.

Gary Brode (22m 16s):
And Roosevelt changed the valuation of that back early in his term as president. And then President Nixon took us off the gold standard, I wanna say 1972, something like that. I could be off by a year. And so right now the US dollar is backed by faith and credit, which, you know, terrific. But that's all that means. So when we talk about fiat currency, it's government issued currency. When we talk about hard currency, we're talking about things like gold and silver or, you know, people will add bitcoin to that list. I certainly would as a hard currency. Other forms of wealth would include real estate, which everybody is familiar with, right?

Gary Brode (22m 58s):
So that's real assets. And then there are also, there's also commodity wealth owning oil or copper or lithium or uranium. Those are all valuable or you know, wheat soybeans, right? Those are all valuable assets that you can own. Fiat currency would be the currency of your country. Sovereign debt is the debt that's owed by your country.

Phil Muscatello (23m 20s):
And you've almost explained all the asset classes in one little, one little lesson

Gary Brode (23m 25s):
There. We cover a lot of ground here.

Phil Muscatello (23m 27s):
Yeah. So credit markets and that, that's the overall term for where debt is bought and sold. And credit markets are, are to do with governments, but they're also to do with corporations borrowing money. And, and this is a lot bigger than equity markets, isn't it

Gary Brode (23m 46s):
much

Phil Muscatello (23m 47s):
Mm.

Gary Brode (23m 47s):
Oh yeah.

Phil Muscatello (23m 49s):
And, and so people, people don't even know about this. Ordinary people don't really know about credit markets, but they don't realize the size of it and how much effect it has on the whole of the economy.

Gary Brode (23m 59s):
Both Government debt and corporate debt is a multiple of the size of the equity market. So when Phil is talking about credit markets, we're talking about debt or sovereign debt. And then when we're talking about the equity markets, we're talking about stocks and the debt markets. The credit markets are much, much larger. There are multiple of the size of the stock market.

Phil Muscatello (24m 19s):
And so what's sovereign debt default look like? Have we sent it in the past? And what are we looking at in the future?

Gary Brode (24m 26s):
So we have seen it and we've seen it multiple times in multiple ways. So first of all, let's, let's just take a quick history lesson. All fiat currency goes to zero, always, right? The Roman empire fell, their currency became worthless, you know, the Spanish empire fell, their currency became worthless. You know, the British Empire hasn't completely disappeared, but in the last 350 years, the value, the purchasing power of British pound has declined by 99.5%. So I'm gonna go ahead and say, that's not so great. You know, the US dollar right now is the world's reserve currency.

Gary Brode (25m 9s):
That currency has lost 94% of its value since 1800. And the official number this year will probably show a loss of purchasing power of seven 8%. I think the real number is double that. What we have is a situation where a all fiat currency goes to zero. And so when you ask, have there been defaults in the past, the answer is yes throughout history everywhere all the time. And you know, in many ways people, you know, talk about the hyperinflation in Germany and Y Mar Germany that led to the rise of the third reich. You can end up with massive amounts of social, military, and political upheaval.

Gary Brode (25m 53s):
Most recently we've seen countries like Argentina and Greece default regularly, right? Argentina and Greece default more often than they don't.

Phil Muscatello (26m 4s):
They're the world champions of it, aren't they?

Gary Brode (26m 6s):
They, they really are. And that ha and the reason nobody really pays attention is they're relatively small economies. Now, if you're living there, it becomes impossible to invest and to save. It's impossible. I wrote an article earlier this year, it's impossible buy a house in Argentina. There's no bank financing. So you need to pay cash for everything. So try to imagine a housing market where you've gotta pay cash for the land. You have to pay cash for the house. There's, there's no financing, because how do you price a currency where inflation is so bad they go outta business every 15 years or so? I think what we could see in the near future, and by near, I mean the next few years is the first default of a major economy in decades.

Gary Brode (26m 55s):
Japan right now, I believe is the world's fourth largest economy by gdp. And you know, they're in trouble. And I, I was writing about this earlier this week, you know, people have have said to me, wait, Japan doesn't have a problem, you know, they can pay their interest expense. And you know, my response is, yeah, that that is correct. The people criticizing me are correct right now. And if we assume a static world, if we assume nothing changes, then they will be right. And I will be wrong. And I'm acknowledging that. But here's the issue. The issue is Japan has issued so much debt that their debt to GDP is now 260%, and they've kept interest rates right around zero for the better part of a decade.

Gary Brode (27m 39s):
And so they have a huge amounts of debt and no way to pay it off. And it hasn't created a problem because interest rates are low. Well, what we're seeing right now is as the Federal Reserve in the United States and the, the ecb, the European Central Bank and the Bank of England all start to raise rates, what that does is it puts pressure on the Japanese yen. And that can sound maybe a little confusing or intimidating for people, but it's actually really simple. Imagine that you are in Japan and you own Japanese government bonds that are paying you 0.2% and you have the ability to buy US treasury bonds at three or 4%.

Gary Brode (28m 25s):
Well, what would you do, right? You would sell your Japanese government bonds, you would sell your yen, you'd buy dollars, you'd use those dollars to buy treasury securities. And it's, it's just the natural order of things. And so what we've seen is people selling their yen and buying other currencies, and what that's done, supply and demand has made the yen very weak. And the yen has gone from ballpark, you know, a hundred yen to the dollar a while back to now it's around 150 yen to the dollar. That's a massive change. Foreign exchange markets tend not to be that volatile. That is a massive change.

Gary Brode (29m 5s):
And so what the Japanese government is gonna have to do, they're either gonna have to make peace with their currency being devalued. And the reason they can't do that is Japan is an island nation without a lot of natural resources. They, they do have some great production capacity and a culture of doing very intense, very dedicated detail oriented work, right? The work they do there is amazing, but they don't have a lot of natural resources. And that means they're importing, well, trying to import with a currency that's being devalued. Good luck getting anything done, right? Your contracts are going to to change literally when things are in transit. And so what they're gonna have to do is they're gonna have to raise interest rates to defend their currency.

Gary Brode (29m 49s):
And wow, that's a problem when your debt to GDP is 260%, and you go from interest rates of zero to something more than zero. And so that's why the people who are critical of deep knowledge, investing's thinking on this have said, wait, they can pay their debt. And again, my response is now, right? If things don't change, they're fine, but I don't, I wouldn't bet on things not changing. I think they're going to have a real dilemma because either the standard of living of their people is going to crash, or the government budget is gonna crash. And right now they're in territory where it's pick one or both, but there's no way they get through this unscathed.

Phil Muscatello (30m 30s):
So Gary, you and I, we both spend a little bit more time on Twitter than, than good for us, or Fin TWIT Financial Twitter. And I noticed it in one of your posts, you said that the magic word when you're looking at Fin Twit stock tips is because tell us about the, because word.

Gary Brode (30m 46s):
Yeah, I, I think that's a key thing. I'm in general, Phil, not a fan of people who make pronouncements. You know, stocks going up, bear's gonna get wrecked, crypto's imploding, like people, they make these, these pronouncements about what's going to happen, right? You know, stocks are, they're, they're gonna go up, they're gonna go down. We're we hit a resistance, you know, the, the bears are gonna get wrecked, the bulls are gonna be crying, and, and people, it's, it's, it's like a sporting event, right? You know, my team's beating, you know, you're, we're gonna, no, but we're gonna score and then we'll be leading. And the ref made a bad call, okay? Right? Everybody's yelling on both sides are yelling at Jerome Powell as the referee.

Gary Brode (31m 29s):
And you know, there's all of this screaming, and I don't like it because one, first of all, my Twitter odometer is completely broken half the time. I can't tell if somebody's serious, if they're sarcastic or if it's an onion headline, right? It's, it's, there's no context. They just make these pronounces markets doing this, stocks are doing that. These people are gonna be happy, these people are gonna be unhappy. And I honestly do, do they mean it? Do they not mean it? You know, and then people start writing underneath that tweet's gonna age well, okay? Like, there's, there's no thought behind it. To me, the key thing, and that this is the key thing, what I wanna do is I wanna evaluate somebody's reasoning, right?

Gary Brode (32m 13s):
To, to make pronouncements is not useful. And in many ways, it reminds me of the old brokers trick. So there's an old trick that brokers would do. They'd have, you know, a thousand names. And so they'd split them into, and so for 500 of those names, they'd say, we think at and t is a huge buy. The other 500, they'd send it. They'd say, we think at and t is a huge sell. Whichever one was right, they'd take that 500, they'd split it. Then they'd say, you know, we think Ford is a huge buy. We think Ford is a huge sell. And so for 250 of those people, they would, they would say, oh, these guys have been right twice, right?

Gary Brode (32m 53s):
Well, they weren't right twice, they were actually wrong three quarters of the time. And, and so the issue with that is when people don't explain their reasoning, it's possible for them to say these cryptic things. Say, I meant it. I didn't mean it. You misunderstood. Okay, enough, give me, I think stocks are going up because, and then explain your reasoning, right? I think this stock is going down because explain your reasoning. And once you do that, it's impossible to do the brokers trick of telling half the people, it's going up, half the people, it's going down, okay, we were right. See, we're geniuses. We were wrong. We were kidding. We didn't mean it. I I have no time or patience.

Gary Brode (33m 33s):
And,

Phil Muscatello (33m 34s):
And we were on the other side of the trade both times

Gary Brode (33m 36s):
Anyway. Right? Exactly right. We were, we were right. And on the other side, and you know, I was talking to someone, I was talking to a new subscriber the other day, and he asked me a great question. So he came in and he said, Hey, I see you've got these stocks on your recommended list. He said, you know, you've made money in them. You know, they like, we've owned energy all year. He said, so do I buy them now? Or they just a hold? I said, hang on a minute. If I own it, I own it every day. I could sell everything today. I could sell everything tomorrow. Everything you own, you're buying it as of every day and you own it as of every day. And I said, the other thing is, I don't like when people do the, well, yeah, it's a hold because it leaves, it leaves people open to manipulating it, right?

Gary Brode (34m 23s):
To manipulating the results. So let's imagine, Phil, you say to me, well, Gary, you own these stocks, what do you think? And I say, oh, you know, Phil, I've made a lot of money and it's just a hold. And so that way if the stock goes up, I say, see, Phil, I was right. I owned it. I made even more money. If it goes down, I say, see, Phil, I was right. I told you not to buy it no matter what, I'm gonna claim victory. That's nonsense. I, I like when people are crystal clear, this is our opinion, this is why, this is the research, this is our reasoning. Unravel it for people. If you wanna be taken seriously and you, you need to take the risk of being wrong. And you know, that's the thing that we do at Deep Knowledge Investing.

Gary Brode (35m 3s):
We explain our reasoning to people. We take a clear position. We're right most of the time, but not all the time. And you know, I had, I got a text message from, you know, a client last week and you know, he said, Hey, I made money in this name and you know, it was because of you and do you still own it? And I said, yeah, you know, I still own it. Great, glad you did. Well. And then he sent me a complaint. He said, you know, I, I got heard in this other name and it was something that I had recommended and own, and what could I do? I said, yeah, look, I still own it, but the stock is done badly. And you know, I'm, I'm sorry it's been a negative experience so far. The best I can tell you is I still like the fundamentals.

Gary Brode (35m 44s):
I still own it, but I, I wrote, I'm sorry, because let's be clear, you know, let's, let's own those mistakes. Let's explain the reasoning to people. Let's give people a, a way to evaluate the quality of thought and research behind what's happening. Because without that, then it's just somebody giving you tickers, giving you picks, and you have no idea, as you said, what they own, why they're doing it, who they're saying what else to, whether they're gonna stand behind that recommendation. Or they're gonna say, oh, I was just kidding. I didn't mean it. I just, I like when somebody says, I think this because,

Phil Muscatello (36m 21s):
And that, that's a real problem, isn't it? Because so many people just want the tickers handed to them on a plate. It's just like, you know, they start realizing how much hard work it is to value a company and they go, ah, screw it. Just gimme the ticket. Tell me what to buy.

Gary Brode (36m 36s):
You know, it's kind of funny that you say that because that was one of the things that we had to deal with at Deep Knowledge Investing. You know, early on I'd do these 10, 20 page reports and nobody was reading them, but if I'd linked to an article or did something shorter or highlighted somebody else's work or wrote a tweet on something, I mean, it could get tens of thousands of views. And so, you know, what do you do? In our case, what we've done is we haven't changed the quality of work, but we've made the expression of that idea the way we communicate it to people, more simple, shorter, more approachable. And for our subscribers, like there are some people who just want the ticker, we keep a recommended page.

Gary Brode (37m 21s):
And so if you go to the, the recommended page, it'll say, you know, own, you know, XYZ ticker, but it's hyperlinked and it's hyperlinked to the report. And so for the people who want to really read the 10 or 20 page report on it and really understand it, that information's available for the people who just want the ticker. They can pull it off the website and they know what I own and they know that I'll update it if anything changes. But yeah, communicating that to people, it's, it's a challenge and it's something we think about all the time. But I think for us, the key point is to be accountable, is to act with integrity. If I recommend something, it means I own it.

Gary Brode (38m 1s):
I don't recommend something that I don't own in my personal account. And I put people in a position where they can evaluate our work and they can say, I made money in this. I lost money in it. You were right, you were wrong. You're a hero, you're a goat. You know, you're welcome, I'm sorry. And let's just act with integrity and be honest and acknowledge we're not gonna be right all the time, but we're never gonna be cryptic or try to cover our rear ends. In fact, the the tagline on the website, I think says, the only thing we don't hedge is our opinion.

Phil Muscatello (38m 32s):
So Gary, how can people find you? You already said it. Was it Gary? Gary underscore Brode on Twitter?

Gary Brode (38m 37s):
Yes, on on Twitter. That's a great place. The other place to go is if you go to deep knowledge investing.com, you have two options. Click the subscribe button, there's a free option if you click that you don't get access to the stock picks or you know, if my view on the market is changing, you're not gonna get that. But you do get the weekly five things to know the monthly post. It's a good way to keep track of, you know, what's going on. General thoughts on things for people who are more curious and more interested. We do have a subscription option right now where people can try a month of the premium for free.

Gary Brode (39m 17s):
And so, and we don't fool people with it, it when you, if you sign up for that, you click, you know, it's the one that's the individual subscription. We charge people $50 a month, but it says first month free, and you'll see it when you go check out, it will show amount you're paying zero. It will be crystal clear. There are no weird, funny charges that you know, you aren't expecting. And it, and it gives you the date too. We made sure we weren't fooling people. So you go to check out, it says zero, and it says, if you like it, great, stay. We'll charge you in a month. If you're not happy, you know, cancel your subscription, buy such and such a date. And you know, no problem. Either way, it's, it's a chance for people to get a better sense of what we're doing and thinking and writing.

Phil Muscatello (40m 1s):
Gary Brode, it's been great having you back on. Thanks for coming on

Gary Brode (40m 4s):
Again. Thanks, Phil. Great speaking with you. I appreciate it.

Phil Muscatello (40m 7s):
If you found this podcast helpful, please tell a friend, especially if it's someone who needs to start thinking about investing for their future, you'll be helping them and helping me to keep this show on the road.

0 (40m 17s):
Stocks for Beginners is for information and educational purposes only. It isn't financial advice, and you shouldn't buy or sell any investments based on what you've heard here, any opinion or commentaries, the view of the Speaker Only not Stocks for beginners. This podcast doesn't replace professional advice regarding your personal financial needs, circumstances, or current situation.

Phil Muscatello (40m 36s):
And thank you for listening to my podcast.

Stocks for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Stocks for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.

 

 

 

 

 

 

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