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Expert Investor: Lyn Alden – Bitcoin, the US Dollar & The Fed

HOSTS Alec Renehan & Bryce Leske|3 September, 2020

The past few months have seen an unprecedented monetary policy response from the US Federal Reserve. Under the guise of doing ‘whatever it takes’ to keep the markets and economy stable, the Fed has printed money at rates never seen before, with much of it ending up in financial markets.

To help us understand what the long-term implications of this policy setting will be, we spoke to Lyn Alden, an expert on macroeconomic issues with over 15 years experience in investment research. Lyn’s work has been editorially featured or cited on Business Insider, Marketwatch, Time’s Money Magazine, The Daily Telegraph, The Philadelphia Inquirer, The Street, CNBC, US News and World Report, Kiplinger, Huffington Post, and she has appeared on Real Vision, The Investor’s Podcast Network, The Rebel Capitalist Show, The Market Huddle, and many other podcasts. She is also a regular contributor to Seeking Alpha, FEDweek, and Elliot Wave Trader.

In this episode we cover:

  • Lyn’s personal investing philosophy
  • How she explains what has happened in financial markets since COVID
  • The US government’s fiscal response and what it means for US government’s debt
  • How the US will manage its debt (now over 100% of GDP)
  • Whether the US dollar will hold its status as global reserve currency
  • The Federal Reserve’s monetary response to the COVID crisis
  • The long-term implications of the Fed’s $7 trillion balance sheet
  • What discount rate Lyn uses with interest rates at historic lows
  • Why Lyn is bullish on Bitcoin

Bryce: [00:01:28] Welcome to another episode of Equity Mates, the podcast, where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren Ren. [00:01:43][15.0]

Alec: [00:01:44] I'm very good Bryce very excited for this episode. There's a lot going on in the world and financial markets at the moment and I'm excited for this interview because I think we're both going to leave it with a little bit more knowledge and a little bit more understanding about how to make sense of it all. [00:01:59][15.5]

Bryce: [00:02:00] Absolutely. It is an absolute pleasure to welcome Lyn Alden to the show. Lynn, welcome to Equity Mates. [00:02:04][4.8]

Lyn: [00:02:05] Hey, thanks for having me. [00:02:06][0.7]

Bryce: [00:02:06] So Leanne's background lies in the intersection of engineering and finance. Lynn has a bachelor's degree in electrical engineering and a master's degree in engineering management with a focus on engineering, economics and financial modelling. She oversees the finances and day to day operations of an engineering facility. Lynn has been performing investment research for over 15 years in various public and private capacities. Her work has been editorially featured or sighted on Business Insider, MarketWatch, Times, Money magazine, Daily Telegraph, CNBC and just to name a few. We've recently heard her on a number of our favourite podcasts. She's appeared on Real Vision and we follow her on Twitter as well, where she produces some of her amazing work. So, Lynn, it is our absolute pleasure, as I said, to welcome you. And we might get stuck into our overrated, underrated game, if that's OK. [00:02:56][50.4]

Lyn: [00:02:57] Sure. Yeah. [00:02:57][0.5]

Alec: [00:02:58] So we like to throw out a few different indexes, Thain's investing ideas, and just get your thoughts on whether they're overrated or underrated to get a sense of where your head's out and how you think as an investor. So we'll start broad. We'll start with one of the major US indexes. So overrated or underrated, the S&P 500. [00:03:16][18.2]

Lyn: [00:03:17] I think it's overrated because it's very expensive, [00:03:19][1.6]

Bryce: [00:03:20] overrated or underrated. The Fed's response to covid-19. [00:03:23][3.8]

Lyn: [00:03:25] I think that's simultaneously overrated and underrated. I think some people thought they did a perfect job and other people hated every single thing they did. And I think the real answer is probably somewhere in the middle. [00:03:34][9.1]

Alec: [00:03:35] I'm excited to unpack that a little bit more in the interview, because you've been tweeting a lot about the Fed and you've been speaking a lot about the Fed in their response. And I'm excited to unpack that inside a little bit more before we get there. Moving on, from the Fed to the US government policy response, overrated or underrated, the impact of covid-19 on the US economy and the government's response. [00:03:57][22.1]

Lyn: [00:03:58] That's two separate parts, I guess, on the on the economy. Initially, it was underrated. Now, at this point is probably overrated. Now it's kind of the long term aspects, like the debt levels that were already there kind of playing out. So it was kind of like the the pin that popped it government response. A lot of it was state response. So a lot of people think of it as that the federal government doing its own thing, whereas really a lot of the response was state based. I think, you know, some states did better than others. I think the federal level was not great for a lot of reasons. [00:04:24][26.2]

Bryce: [00:04:25] Overrated or underrated Bitcoin. [00:04:26][1.7]

Lyn: [00:04:28] I think that's underrated. I think that's probably has some pretty good prospects over the next call it year and a half. [00:04:33][5.9]

Alec: [00:04:35] There's a large segment of our listener base that will be loving to hear that. And similarly, a large segment that will be waiting to hear. That's another asset that has done well recently in this Covid period. Is gold so overrated or underrated gold [00:04:51][16.1]

Lyn: [00:04:52] probably overrated in the near term, underrated in the long term. [00:04:54][2.8]

Bryce: [00:04:55] So since Covid hit, we've just seen the FANG stocks absolutely go through the roof. So overrated or underrated, the fang stocks. [00:05:03][7.8]

Lyn: [00:05:04] I think that we kind of betaken independently, but as a group, I think they're overrated, primarily due to valuation reasons. And the previous answer about the S&P 500, they're kind of leading the whole index up and they're kind of the big chunk of the reason why it's it's quite expensive from a valuation standpoint. [00:05:21][17.5]

Alec: [00:05:22] Yeah, the valuations are crazy. We're recording this on the 21st of August, Australian time, twentieth of August, US time. Yesterday, Apple became the first to trillion dollar company, which is just unbelievable. [00:05:34][12.9]

Bryce: [00:05:36] Did you think we would say that this. [00:05:37][1.4]

Lyn: [00:05:38] No, I wouldn't have guessed it. And if you look at their fundamentals. Right. So a lot of a lot of those stocks are benefiting from covid-19 as people kind of have to migrate to technology more and more. But Apple's current and expected earnings are pretty slow growing. So the whole increase has primarily been from valuation increases. [00:05:56][18.3]

Alec: [00:05:57] So when we got two more topics to throw out in Australia, investors are known to have a love affair with residential property. It's the most invested in asset class. A lot of Australians traditionally tied all that wealth up in that asset class. We're interested in your perspective on the US so overrated or underrated US residential property. [00:06:18][20.5]

Lyn: [00:06:18] I think it's a very local market. So I think city property, especially in some of the major cities, is probably overrated. I think residential property in. Any suburbs, many secondary cities is probably about fairly valued, [00:06:30][11.3]

Bryce: [00:06:30] leaned to close it out and something you've written about overrated or underrated, the idea of contrarian investing. [00:06:35][4.7]

Lyn: [00:06:37] I think it's underrated, but often misapplied. [00:06:39][2.3]

Bryce: [00:06:40] Interesting. So before we jump into unpacking a lot of that stuff, we love to get an idea about your background, Lynn. So the story of everyone's first investment is often a good one. So we were wondering if you can share yours and perhaps any of the major lessons that you learnt from it? [00:06:57][17.3]

Lyn: [00:06:57] Sure. I'll give you two one pie. My first investment ever was actually gold and silver coins because I was I was a little kid. I was literally like 10. And I had an uncle that collected, like, cheap coins, you know, like just like a like a box of like foreign coins from around the world. And the whole box probably worth like 40 bucks, like it wasn't really worth anything, but it kind of sparked my interest in coin collecting. So for a while I collected a lot of cheap coins and then I expanded into silver coins and a couple of small gold coins. And that was back in the day. I was like 10 years old and that was in the late 90s. And that was fortunately like a really cheap period for four precious metals. So it was really kind of easy to get them. And the main lesson I got from that was not checking price every day, because just like I was, I kind of just grew comfortable with withholding an asset that I liked. And I knew it would hold its value over the long term. Yeah. And so, you know, I checked the price like once a year. And I think that was kind of a valuable lesson. My first stock investment was Adobe Stock, which is a well-known software company, and I bought it after I had a pretty significant correction when I was a teenager and I sold it for, you know, a decent gain about a year later. And I guess my lesson was my reasons for buying it were very simplistic. I was new to investing, right? So I knew it went down. I got a little cheaper. I didn't have any sophisticated ways to value. It is kind of like speculative. It's kind of was like, well, you know, Buffett says buy things when they're cheap, you know, as a teenager did not as doing, but it worked out. And then I later reinvested it a while back after that to actually still hold not the same shares, but I still hold a position that was my first stock investment. [00:08:32][94.9]

Alec: [00:08:33] I was going to say, if you'd been holding it during the the recent bull run, you would be very happy. It's been one of the tech stocks that have that have done very well for themselves out of the Covid dip. [00:08:44][10.7]

Lyn: [00:08:44] I have a small position. I didn't have it for a while. Then I bought it during the Q four sell off in twenty eighteen. So we had like a correction in some of the tech stocks and I did add a very small Adobe stock position and I still just let it run. It's one of the ones I haven't sold. [00:08:58][13.4]

Bryce: [00:08:58] You still have your box of gold and silver coins. [00:09:00][1.5]

Lyn: [00:09:01] I luckily sold that in twenty eleven but I started reinvesting in twenty eighteen. [00:09:05][4.8]

Alec: [00:09:06] So over the years from you know, when you first bought those gold and silver coins to when you bought Adobe to, to where you are now, have you developed a personal investing philosophy. [00:09:17][10.4]

Lyn: [00:09:18] Yeah. I mean that was I guess the start with the gold coins over twenty years ago and the start with Adobe stock was like fifteen years ago, you about fifteen. So it was kind of a slow change over time. Now my approach is kind of simultaneously top up and bottom down. So I still do individual stock analysis, I still do precious metal analysis. I've obviously learnt a lot along the way, so I have a little bit deeper ways of analysing them. But then I also incorporate a top down kind of macroeconomic analysis. So I look at economic indicators and rate of change terms to see kind of what's happening with the economy. And I look for kind of interesting bottlenecks or big monetary shifts or fiscal shifts that can really kind of change the direction of the asset classes. [00:09:58][40.1]

Bryce: [00:09:59] So we've been loving following you on Twitter and and your blog and sort of following what you're writing about in terms of what's going on over in markets at the moment. So how would you explain what is going on in markets right now to someone who's sort of just come up from spending six months in the submarine and has no idea of what's going on? [00:10:18][19.0]

Lyn: [00:10:18] Sure, I would say that, you know, going back to before they got in the submarine, we've been building up in many markets around the world a debt bubble for a very long period of time. And that's not unusual. That's kind of part of a long term debt cycle. We've had these in the past, many decades ago. We're kind of working through this one ever since around 2008, really. It's kind of like phase two of that debt bubble. And this particular leg of it was was hit by a pandemic, obviously, and that caused a lot of rapid market dislocations. But those were all exaggerated by the fact there's so much debt in the system already. And then since then, we've had very massive, kind of unprecedented fiscal response, things not seen since roughly World War Two in terms of fiscal spending as a percentage of GDP in the United States and many other countries. And, you know, just it's been a very volatile year. And this is also kind of it's caused a rapid shift towards more and more technology things. So even when the pandemic kind of goes away, I think some of these these shifts are permanent. Like I think the increased online sales and and other things are kind of, you know, increased teleworking and things like that are probably somewhat here to stay. [00:11:23][65.0]

Alec: [00:11:24] So you mentioned that the debt by. And some of the numbers coming out of the US are pretty phenomenal if we start with the US government response and then we'll move on to the Fed after that, the US government putting out multiple trillion dollar stimulus bills, the US debt to GDP ratio is more than one hundred percent. And correct me if I'm wrong, but this is the first time since World War Two that that's been the case. How do you think about where we are with US government and US debt more generally? And what do you think the implications of that are going to be going forward? [00:11:59][34.3]

Lyn: [00:11:59] Yeah, so this is the you know, like you said the first time, it got that high of a debt level since World War Two, we actually went into this crisis with debt to GDP over 100 percent so far. It's already over one hundred and thirty percent in a very short period of time. So we've added twenty five percent or so just in months. Historically, sovereign debt bubbles that are that are denominated in one's own currency tend to be worked through with some degree of currency devaluation. So would companies get overloaded? They default. When emerging markets get overloaded with dollar denominated debt, which they can't print, they often default. Whereas when countries kind of have too much debt in their own currency, they usually inflate part of it away. And that's how we that's how we saw the World War two debt. They kept yields below the inflation rate for a decade and then later they failed to raise interest rates as fast as inflation. So, you know, there were two decades in the 1940s and 1970s where Treasuries failed to keep up with inflation. So that time we finished the 1970s decade, we had devalued a lot of that debt as a percentage of GDP. And so I think investors have to kind of be aware of that potential outcome in the years, decades ahead, not just the US, but many countries and but not every country in the same way. So some countries have more government debt, some countries have more corporate debt, and some countries have more household debt as a percentage of GDP. [00:13:14][74.3]

Bryce: [00:13:15] When you mentioned the currency there and the U.S. has enjoyed its status as the global reserve currency for quite a while now. Do you think that the current policy settings are sort of putting that at risk? And what would the implications of the U.S. actually losing its status as the reserve currency for the world? [00:13:35][20.7]

Lyn: [00:13:36] So I think that's been an issue that's building for a while. So back when we implemented the global reserve currency as currency structured, there were economists like Robert Griffin and Keynes that warned against that the structure would eventually lead to large trade deficits. And that's exactly what happened, because basically what the reserve currency does is it creates a lot of external demand for it, which pushes up the valuation. So with most countries, when they have, say, a trade deficit, eventually there's some sort of crisis. Their currency weakens somewhat and it makes their import power weaker and it makes their export competitiveness stronger. So that kind of normalises over time was with the US because we have so much extra demand for our currency. Our trade deficit never normalises. So we just have kind of massive, massive deficits over decades. And then it really started in the early 1970s with the with the petrodollar system. So the version of the the current system as currently constructed and also after World War Two, the US was nearly 40 percent of global GDP because it was kind of like the last man standing. So as Europe and Japan recovered and then as emerging markets, especially China, grew in prevalence, the U.S. is now about 20 percent of world GDP or even less than that on a purchasing power parity basis. We're no longer the biggest commodity importer. That's China. And so basically, we've had to export. We've had to run a consistent trade deficits and we've basically exported a lot of our industrial base. So we have one of the most service-based economies in the world and we don't really make a lot of our own things even more so than some of our other developed peers like, say, Japan or Germany. So it's not just like all developed countries shifted their manufacturing to emerging markets. They all did so at different degrees. So a lot of, you know, advanced nations still have kind of skilled manufacturing, whereas, you know, the United States kind of exported a greater share of that. And so we had a lot of benefits the beginning from that system. But over the past few decades, a lot of our working class citizens have really suffered from that because those jobs have been impacted the most. So that's contributed to the fact that America has amongst the highest wealth concentration in the developed world, you know, compared to many of our developed peers. And, you know, it's a very kind of separated society because of that, because, you know, there are some of us stick out rather wealthy from the system, whereas many people, particularly in the lower half of the income spectrum, we're kind of more negatively impacted by it, especially in recent decades. Going forward, I think we're probably going to see more multipolar currency system. So there's no country now that has anywhere like the status had that the United States had after World War Two. Right. There's no country kind of large enough that it's that its currency can be the one currency that all commodity pricing in the world happens. It like the dollar, including the including that it states anymore. We're just not really big enough. So we're probably, you know, moving more and more towards kind of a, you know, several top currencies. So, you know, Russia's pricing some of its energy in euros now, China and Russia between themselves. They are doing more trade outside of their Dollars network, right, so they rapidly decrease their daily usage in the past two years. And I just think we're kind of headed towards a more multipolar currency world. And I think eventually the United States currency is going to weaken. But it's unfortunately kind of a necessary effect to happen if the US wants to kind of rebuild its industrial base. [00:16:44][187.9]

Alec: [00:16:44] So I imagine there are people listening who are trying to think through all of this. What this means, longer term and especially a lot of listeners early in their investing journey, probably hold a few US stocks or a few US indexes. How do you think this this debt bubble and the devaluing of the US dollar to manage some of that debt? How do you think that will affect the stock market and some of the major US companies going forward? [00:17:10][25.9]

Lyn: [00:17:11] I think that in part depends on policy details like how it's done, what path it takes. I don't think there's one inevitable outcome, but I will say that if you look back over equity markets for the past 50 years, generally an equity market doesn't outperform the rest of the world for two decades in a row. So in the 1970s, you know, the U.S. did do very well. In the 1980s, Japan did amazing. But then they had it. They had a bubble in the 90s. The United States did very well. In the 2000s. It was emerging markets. They did very well. And then in the 2010s, the US market did very well. And what generally happens is that, you know, some sort of monetary, fiscal or economic things kind of shift in that country's favour. And it usually starts from low valuations in the equity markets, go up to very high valuations. And then from that high point, usually, you know, things change and there's like big monetary policy shifts and things like that. And then that highly valued equity market tends to not do very well. So, you know, my base case is that I don't really see the equity market in the U.S. doing very well in the 20, 20 decade from current high levels. Now, I think some individual stocks could do very well. And I think we could see some of the laggards over the past decade in the United States do very well. And I think we could see, you know, some other global markets do somewhat better than the U.S. I think it's you know, it's kind of a good idea to stay globally diverse. . [00:20:20][189.4]

Bryce: [00:20:22] So, Lyn, we've covered off a bit about your background and started to get a bit deep in terms of what is going on over in the markets at the moment. And one sort of very interesting move that we're seeing at the moment is the trillions of dollars that the Fed is continuously printing. So I guess from a basic point of view, have the actions of the Fed, do you think, changed markets and investors expectations sort of going forward, given now that it's almost a safety net in some investors eyes? [00:20:51][29.6]

Lyn: [00:20:52] I think to some degree, a lot of it, though, was actually the fiscal spending. So a lot of the tangible effects on the economy in the US were done by the fiscal authorities, Congress and the president. And that's because the Fed can print money and buy assets so they can buy Treasuries, they can buy mortgage backed securities. They expanded their mandate kind of unofficially and controversially to buy things like corporate bonds. So they definitely kind of helped the corporate credit market. You know, I think that's that opens up a lot of issues. The major impact to the economy was the United States passed a two point two trillion dollar stimulus package and then followed up with like another 500 billion. So it's somewhere in the ballpark of like three trillion dollars. And that's, you know, it's a very big chunk of GDP. I mean, we have over 20 trillion in GDP. So that that's in the ballpark of 15 percent of GDP. And that included 12 Dollars checks for most people, whether they're employed or unemployed. That included six hundred a week USD in extra unemployment benefits on top of state unemployment benefits. So a lot of people got paid more from being unemployed for four months than they made when they were working, if they were on kind of the lower half of the income spectrum. And we also spent half a trillion dollars sending loans out to small businesses. And most of those are going to be forgiven as long as they met certain conditions. So that's mostly free money to small businesses. So that was a very large capital injection directly into the economy, which is very different from what we did during the global financial crisis than any previous recession. So that kind of fundamentally boosted the real economy in a certain way, kind of it made things less devastating, less insolvent, solvent than it otherwise would have been. But because it's not like we had a store of money to pay all that, we didn't raise taxes to do that. We just printed money and did that. And the way that works is that the you know, we had to issue a lot of treasuries to do that. And the Federal Reserve bought a very large percentage of them. Now they can't buy directly from the Treasury. The Treasury can sell those securities to large banks and then those large banks can turn around and sell right to the Fed. So basically a big chunk of what the Federal Reserve did was monetising those deficits, which is actually the same thing we did in World War two. So it's a kind of a blended fiscal and fed effort rather than just the Fed. And I do think it changes behaviour, you know, creates some of the aspects were kind of necessary, but other aspects kind of create a lot of moral hazard. [00:23:06][133.9]

Alec: [00:23:07] I don't want to pick up on that moral hazard point because obviously the Fed stepped in 2008 during the global financial crisis and didn't manage to unwind that balance sheet before the next financial crisis. They started to unwind and we saw Deep Dive at the end of twenty eighteen. And then when the pandemic hit in twenty twenty, the balance sheet grew again and it's now over seven trillion dollars of assets that the US Federal Reserve hold. Now, how do you think about the Fed navigating this path going forward where at some point going to have to start unwinding the seven trillion dollars they have? But at the same time, if another crisis hits in the future, investors and markets will expect the Fed to step in again. [00:23:52][44.8]

Lyn: [00:23:52] Yeah, the short answer is that they're not going to unwind it, or at least not most of it. So they try to unwind a little bit of it after the previous crisis. And it was unsuccessful. And, you know, they've unwound a little bit of the recent action, like they unwound the repo lending and most of the swap lines. But they're almost certainly not going to go to unwind the Treasury securities purchases and probably a big chunk of the mortgage purchases as well. So I don't think it's going to be unwound. If you look at, say, Bank of Japan's balance sheet, they went into this crisis that over 100 percent of balance sheet relative to Japan's GDP. And now that's over one hundred and thirty percent. The Fed went into this crisis with maybe, you know, balance sheet of like 20 percent of us GDP. And that skyrocketed. So, you know, we're at thirty seven percent now. I think, you know, in the years ahead, the Federal Reserve balance sheet is going to keep increasing. I think we're going to have to they're going to keep monetising deficits for at least a large portion of their deficits. And that's kind of part of my thesis for why going forward, the dollar probably is in a in a somewhat longer term downtrend here, because we're probably going to monetise larger deficits than the majority of other countries. [00:24:55][63.0]

Alec: [00:24:56] So just on that, you mentioned before that countries that have debt denominated in their own currency don't have sovereign debt crises. If we think about some of the more recent sovereign debt crises, it's when the debt has been denominated in a foreign currency. So, you know, like Greece during the GFC, do you think there is a limit to that if the US keeps monetising the debt and the Fed? Printing and buying more of it. Do you think that could go on forever, as long as the currency devalued or do you think? Do you think there's a limit to that? If it gets to 10 trillion or 100 trillion at some point, that thesis doesn't hold. [00:25:34][38.3]

Lyn: [00:25:35] So there are certain limits. And I didn't say that they don't have sovereign debt crises. It's just that the type of sovereign debt crisis is very different. And so it tends to be less acute and more kind of subtle or longer term. And the crisis primarily takes the form of treasuries or for other countries like other sovereign debt, failing to keep up with inflation for a prolonged period of time. So if you look at the US as an example, there is about a four decade period from the late 1930s to the late 1970s or mid mid 30s to mid 70s, where if you bought and held a 10 year treasury to maturity, most of those years in that 40 year period, you failed to keep up with inflation. In the early part of that, it was due to the Great Depression and kind of a private debt bubble. And then for the most of it, after that, it was due to the federal debt bubble. So that's how it usually takes the form of its pretty significant currency devaluation. Now, this one's trickier because, you know, the world has never been this interconnected, this this financially complex. And we have a private debt bubble and a federal debt bubble at the same time. Whereas back in the back in the previous debt bubble, they were they were fortunately able to have them separated. So the private debt bubble peaked in the early 1930s during the Great Depression. And then they pretty much worked through that very rough time, obviously. And then in the 1940s, when they had the federal debt bubble, they then after the war worked through that, they kind of had that that benefit of being able to separate them. In this current environment. They're both high together, which increases the risks of a more systemic issue and that they kind of lose control of it. [00:27:09][94.0]

Bryce: [00:27:10] So I'm interested to know when you're doing your analysis at the moment with rates so low, what are you using is your risk free return? [00:27:17][7.2]

Lyn: [00:27:17] So I often use 10 percent. Instead of focussing on a risk free turn, I often focus on a target rate of return. But another way that I look at looking at kind of what rate to use, I also look at the growth of the money supply. So the long term growth rate of money supply, because that is another proxy for inflation, except that most of that money has been getting to consumers over the years. So it's mostly gone into asset prices. So I look at that rate and I also just maintain a high target return rate. [00:27:45][27.5]

Alec: [00:27:46] So then what is the current rate of growth in the money supply? [00:27:49][3.8]

Lyn: [00:27:50] So it varies. This year it's well over 20 percent in the U.S. So we have we have 20 percent broader money supply or actually about twenty five percent broader money supply than a year ago over the past decade. I don't have the numbers in front of me. You know, a few months ago before this crisis, I would have said it was like six percent, but now it's like eight percent. And it's all because in this last year, we've had a very big jumps. If you do, the 10 year annualised rate impacted it pretty significantly, know high single digits maybe. [00:28:18][28.2]

Alec: [00:28:19] I imagine if you used the twenty five percent that it is now, there's not a lot of value out there. [00:28:24][5.4]

Lyn: [00:28:26] Yeah, definitely. So going back to the point of the Fed printing, they've been tapering their purchases lately. And if you look at money supply, that's spiked up dramatically. But in the past three or four weeks, the US money supply has actually gone down slightly and the markets continue to go up. And, you know, the Congress is currently gridlocked on another round of fiscal spending. So earlier I said that we sent out all these checks to people. We bailed out businesses. We thought we did all the stuff. But those all ended at the end of July. And so actually in August, we kind of went off a fiscal cliff here. So, you know, all the things that kind of propped up the economy, kind of papered over the issue, they all kind of shut off. And so now we're actually not seeing a lot of money printing. We're not seeing a lot of spending. And it's going to be very interesting because that could be risky for risk assets. And a lot of people that were kind of relying on those are going to be harmed. But we also at the same time, we're seeing just less currency devaluation happening because they're not really spending and then printing to do that spending. [00:29:24][57.3]

Alec: [00:29:25] So then you mentioned that, that, you know, the money supply is flowing at a pretty unprecedented rate and we're not seeing a lot of inflation in the in the real economy, let's say, but was saying a lot of assets hit all time highs or Groer. Pretty incredible. You know, we've touched on the U.S. stock market, which is fully recovered from its lows. We're seeing gold hit highs. We're seeing Bitcoin bounce again, all of these asset classes running. Is that the effect of this increased money supply? And I guess the second part of that question is, do you think at some point it will flow through to the real economy? [00:29:59][34.3]

Lyn: [00:30:00] So, yes, to both questions. I think the significant amount of printing does wind up in financial assets because with bond yields so low and with money supply increasing so quickly, at least until a few weeks ago, investors wanted to get back into risk assets, into scarce assets and things like that. So we've seen we've seen gold do very well. We've seen silver do very well. We saw a big shock in disinflation. So we. So inflation expectations crash in March during the worst part of the sell off, but they've since rebounded. So we've seen kind of, you know, copper went down and then came back up. Energy, how that that crazy period where it definitely hit negative prices in the futures market and that somewhat bounce back. It's still actually it's been one of the weaker commodities compared to, say, copper. So, you know, I think all this printing has propped up asset prices to a pretty significant degree going forward. A big reason why the printing after the previous crisis didn't really get into inflation is because most of that money didn't get into the economy. So the US banks went into that crisis with very little cash, like something like three percent of cash as a percentage of assets. And by the end of that crisis, years later, all the rounds of Federal Reserve QE banks were brought up to about 15 percent cash as a percentage of assets because the Federal Reserve bought some treasuries there, mortgage backed securities and filled them up with cash. So a lot of that QE just kind of wound up in the banking system and recapitalise the banks. And in addition, homes and stocks collectively, you know, U.S. household wealth decreased by about 11 trillion dollars during that crisis. So it fell from about seventy one trillion to about 60 trillion. So the fact that the Federal Reserve printed three point six trillion or so, it was reflationary, but it didn't cause widespread inflation because it was offset by a very significant deflationary shock. And in this crisis, what's different is that they like I said, they handed out money to people. They handed out money to businesses, a lot of that printing round up directly in the economy. So we did see a spike in food inflation. We also had some supply chain disruptions for obvious reasons. So I do think going forward into the 20s, especially when they get, you know, kind of past the immediate aftermath of this pandemic, I think as as the economy returned to normal and money supply, you know, the velocity stopped decreasing. I do think there are risks of greater inflation now with all this new money in the system. And the U.S. is probably going to keep monetising deficits for quite a while. So I do think this is an ongoing risk for investors to be aware of. [00:32:21][141.4]

Bryce: [00:32:21] So in that sort of begs the question then, for a lot of our listeners who have never actually experienced anything like this before, given where they're all in their investing sort of journey, it begs the question as to how to actually manage a portfolio during times of such, I guess, unprecedented behaviour from governments and also the market. So I sort of basic level, how should we be thinking about asset allocation at a time like this? [00:32:48][26.8]

Lyn: [00:32:49] Investors all have their own processes, right? Some people are traders. Some people are investors. Some people, you know, they their skill set is in momentum investing. So they they follow trends. Other people prefer kind of a more passive approach or a contrarian or value approach. So, you know, the first step is to know kind of what your process is and go from there. I think in general, it's good to kind of look at assets that haven't done well over the past decade overall and to see which ones, you know, kind of better positioned. So the U.S., for example, is historically quite expensive, whereas the equity markets of, you know, many other countries are not historically expensive. So I think that there is I think global equity diversification is going to be a big theme this decade. You know, from an American investor standpoint over the past decade, it's pretty much just if you had any sort of international equity, exposure is pretty much just a drag on a portfolio. Right. So all the benefits were to the downside of investing pretty much in anything other than the S&P 500. And that's not historically usual, or at least like I said, there are decades where that that happens and then usually the next decade that doesn't repeat itself. So I think going forward, I think global diversification is perhaps going to be more important. And I also think some alternative asset classes. So commodities tend to operate on, say, 10 to 15 year cycles. And the past decade was very poor for commodities, particularly starting at around twenty, twelve or so since then. And so it's been a very poor decade for commodities. So I think that there are opportunities in some of the commodity space, especially the high quality ones. Like I said before, I'm pretty bullish on Bitcoin over the next year and a half. I think that's an interesting alternative asset class. I think this is going to be a period where having diversification globally and in terms of alternative assets could be pretty important. And historically, when sovereign debt like in the U.S. and many other countries is very high, usually bonds don't do very well over the subsequent decades. So they often fail to keep up with inflation. And so depending on an investor's time horizon, they can make sense in a portfolio to some degree. I say, you know, cash and T bills as a countercyclical, you know, investment approach. So what I think equity markets are overbought, a shift a little bit out of equities and into bonds. And then we get an equity selloff. I put some of those bonds back into the market. So I use bonds like a little bit of a shock absorber, but I'd be cautious of being overweight bonds in this kind of debt heavy environment that often has some degree of sovereign debt crisis. You know, even if it just takes the form of bonds, just failing to keep up with inflation for a long period of time, [00:35:26][156.7]

Alec: [00:35:27] so I want to pick up on what you said there about Bitcoin. It's probably the most controversial asset class, you know, financial circles at the moment. It's been on a little bit of a run recently. In July, you published an article titled Three Reasons I'm Investing in Bitcoin. So maybe can you step us through those three reasons and then talk more broadly about your thoughts on Bitcoin and cryptocurrency as an asset class? [00:35:52][25.3]

Lyn: [00:35:53] Sure. So I originally covered Bitcoin back in twenty seventeen because I got a lot of emails from my readers to cover it. So I covered it in autumn of twenty seventeen after it had that very big run up. And you know, I analysed it from a couple of different perspectives. One of them was as a medium of exchange, the other one was as a store of value. And I took a couple of different approaches and determined that as a medium of exchange is probably overvalued as a store of value. It had a lot of potential, but because of the big run up, it had a lot of positive sentiment and was probably near term overpriced. I also was concerned about Bitcoins network effect because that was kind of a strong season. So Bitcoins share of the market fell to under 40 percent and there was a risk and also, you know, Bitcoin and Bitcoin cash split. And there is this. I had I saw a risk of dilution. So even if a lot of money flows into the crypto space, but it kind of gets distributed amongst many, many different currencies, it doesn't necessarily concentrate and build a strong network effect. So I took no position. And of course, Bitcoin briefly soared at twenty thousand and then collapsed. And then it's been in this big volatile consolidation period for the past couple of years. And so when we had the the March selloff, I saw Bitcoin fall along with many other assets, including precious metals. And in April, in my premium service, we went long bitcoin just under seven thousand. And then I published that big piece in July. Bitcoin is a little bit over 9000 then. And so a couple of different reasons. One is Bitcoin. Most of bitcoins, historical price bullishness tends to happen in the first half of each having cycle. So if you look at the launch cycle and then roughly every four years when it undergoes a new supply, having most of the price appreciation for Bitcoin tends to happen in the first two years of each of those cycles. Second, two years tend to be periods of of either crashes, crashes and then consolidations. So it's kind of like if Bitcoin is going to have a run. I mean, this is kind of the time period where it would likely happen. And that's because if demand stays steady and a large percentage of the existing user base are holding their bitcoin, which they are, we have data on that. And new supply is cut in half basically means that there's still a persistent amount of demand chasing, you know, kind of a a smaller new supply of kind of freely tradable coins. And so that tends to push the price up. And then once it pushes the price up, you get momentum traders coming on board to push the price up even further. And then you get the kind of the bad traders like the fear of missing out, traders piling in and causing a top. So that cycle has as happened three times before the launch cycle and then to having so, you know, I think there's a good chance that's going to happen again over the next year and a half to two years. So given where we are in kind of the Bitcoin having cycle, given the fact that Bitcoin has kind of regained pretty strong network effect, its place in the ecosystem is very strong. Thousands and thousands of all going to come along. And some of them have have kind of novel use cases, but none of them have really kind of replaced Bitcoin as kind of digital gold as a perceived store value is kind of a settlement asset. And then lastly, just the macro landscape. So with all of this, the things I've talked about, like in this kind of long term debt cycle unfolding, it's usually relieved with currency devaluation. And that tends to be very bad for some segments of society and good for other segments of society. But either way, you know, if you're, say, a big bond investor, it's not good for you, whereas a small allocation is something like Bitcoin, as well as allocations to other alternatives like precious metals can defend against that sort of risk. So I do think that Bitcoin, especially in this kind of part of the having cycle, deserves a place in many portfolios. [00:39:30][217.5]

Bryce: [00:39:31] Yeah, fascinating. It's certainly an asset class amongst a community that is dividing opinion. But it's fascinating to think that, you know, this halving, I guess, process. We have to see how it sort of plays out. And you spoke about gold. Does gold have a position in your portfolio at the moment? And how are you thinking about that as an asset class over the next couple of years? [00:39:53][22.1]

Lyn: [00:39:54] Yeah, so I added gold, silver and some of their miners to my portfolio back in October of twenty eighteen. We've had a pretty good run there and the precious metals and I still think they deserve a place in portfolio. I think some of the easy money has been made over the past two years, but I still think longer term into the twenty twenties. I still think that gold and silver and some of the mining companies offer some value that is that is separate from some of the major stock indices. And I think that they could. Do pretty well, both with Bitcoin and gold. One thing I focus on is not being a pro or perma bear. So, you know, 2017 and analyse Bitcoin, I took no position and kind of was was I wrote kind of neutral to bearish on it. I was very cautious, whereas April of this year and since then I've been pretty firmly bullish on it. And so analysis can be can be pretty useless if it's coming from someone that always has the same view. So if someone say, runs a gold newsletter and no matter what the condition is, they're bullish gold. Right. It's not necessarily helpful analysis, whereas someone else uses like, say, deep in the Bitcoin community or deep in the community. If there's always bullish on their chosen coin, then their analysis sometimes is not particularly helpful because it kind of has a directional bias. Whereas for me, I'm lucky that I have a big range of assets that I that I choose from rather than being like a kind of in any specific niche. So at the current time, know the past two years, I like precious metals a lot more than Bitcoin going forward. I think Bitcoin is probably the strongest asset class from an asymmetrical risk reward ratio over the next year and a half. But of course, that you have to kind of manage position sizes to benefit from that kind of risk reward ratio, because if you say put all your portfolio on it, you're no longer benefiting from any sort of asymmetric risk reward. You're kind of it's like a gambling bet at that point. So as a small position size, I think it's helpful and precious metals. You know, like I said, I think some of the easy money is done, but I still think that gold and silver have have pretty far to run in the twenty, twenty decade. [00:41:50][116.7]

Alec: [00:41:51] So in period Equity Mates, we love bold predictions every year Bryce and I make a number of bold predictions to start the year. I'm going to toot my own horn here and say that I predicted that we would have a two trillion dollar company by the end of the year. And Apple has proved me wrong. Right? Nice. When we get experts on the show, we love to ask them the question. So I guess I'll ask you if you had to make a bold prediction for the end of twenty, twenty or beyond into the into the next decade, would you have any bold predictions that you'd be willing to share with us today? [00:42:25][33.9]

Lyn: [00:42:26] Because it's only three and a half months left for twenty. Twenty all going to twenty, twenty one. And I'll say that I think by the end of twenty twenty one Bitcoin will probably be firmly into new all time highs. [00:42:36][9.9]

Alec: [00:42:37] I like that. That's a great bold prediction. We will write that down and we'll come back at the end of twenty, twenty one. [00:42:42][5.3]

Lyn: [00:42:42] Yeah we'll see, we'll see how wrong I am. But yeah that's, that's my, that's my. You want to put [00:42:46][3.4]

Bryce: [00:42:46] a price [00:42:46][0.1]

Lyn: [00:42:46] to it. So I've been, I've been careful about doing price targets because I think there's a very big range that it that it could be. My thesis is that the general shape of this having cycle will probably look like other having cycles. But I don't have a specific price target, I think well over thirty thousand. But I think that there are high numbers that it could possibly touch that can be kind of extraordinary, but I don't know how well it would hold those those levels. But so I think the safe prediction is just well into all time highs. [00:43:13][26.6]

Bryce: [00:43:14] Wow, nice. The other thing that we like doing is as part of the community we built, we're building out sort of a bit of a hypothetical portfolio of stocks that are interesting and that we come across through discussions with the likes of you. So so we were hoping you were able to add to our expert watch list with a suggestion of perhaps a stock or even asset class Bitcoin, if that's what you wanted to do, that we can just add to that watch list and have it as part of our discussion in the community going forward. [00:43:43][29.3]

Lyn: [00:43:44] So a somewhat speculative stock that I've been interested in lately is Tencent. I think that could be a trillion dollar company in the years ahead. I think, you know, it could still take a while now. It's always challenging because China is not known for accurate financial reporting. And so you have to kind of take reports with a grain of salt and you have to kind of manage position sizes around risk. Right. So I don't like to make an investment in a stock that if it if the thesis does not play out materially harms the portfolio in any way. Right. So I don't put, say, 10 percent of a portfolio into a stock or something like that. But within the scheme of a diversified portfolio, I've been pretty interested in Tencent stock for multi year from current levels. It's that kind of a consolidation for a while. You know, we've had this you've had the whole US China trade issues, but it has it has strong growth prospects. And, you know, the stock hasn't really gone anywhere in about three years. It's just a kind of a choppy, slightly upward trend. So I think, you know, the next call it five years, I think I think Tencent could do very well as long as there's not some giant macro event or fraud or something like that that kind of derails the whole thesis. [00:44:49][65.4]

Alec: [00:44:50] Hmm. That's great. We'll add that one to our watchlist. It's definitely a fascinating company and we'll be interested to see how it goes. You've given us a lot of insight and a lot of things to think about. So we want to say a massive thank you for coming on the show. We do like to end with a final three questions that we ask every guest. But before we do, if people want to read more of your work or follow you online, are there particular places where they can go to find out more about you? [00:45:16][26.7]

Lyn: [00:45:17] Sommat Lynda.com? I have a free newsletter and then I also have a. Research service, and I'm on Twitter at Lyttleton Contact, [00:45:23][6.4]

Alec: [00:45:24] and I got to say personally, I love your Twitter, you have a lot of really interesting stuff on there. So for any Equity Mates listening that have a Twitter account, Leanne is definitely one that you should follow. [00:45:35][11.3]

Bryce: [00:45:36] Ren told me last night he's liquidating his whole equities part. I got a long bitcoins. [00:45:40][4.2]

Lyn: [00:45:41] No, I do not recommend that. [00:45:44][2.7]

Alec: [00:45:47] So as I said, we we do like to end with a final three questions, so we'll get stuck into them. The first one is, do you have any books that you consider must read and these can be investing or otherwise? [00:45:59][12.6]

Lyn: [00:46:00] So I think probably the most relevant for this conversation is Big Debt Crises by Ray Dalio. He's the founder of Bridgewater, the world's largest hedge fund, and he's written books about how these long term debt cycles play out. So what what makes the difference between an inflationary or deflationary debt crisis? How emerging market debt crises differ from developed market debt crises most often, and some of the nuances of previous debt crisis. You know, like the the Winmar Republic hyperinflation or World War two kind of Great Depression, US debt bubble, things like that. So I think if anyone wants to kind of a Deep Dive there, I think he has a free PDF version or at least used to so he can look into that. If not, you know, it's probably an Amazon [00:46:43][42.7]

Alec: [00:46:44] as on the second question is, what is your go to source for investing all financial information? [00:46:49][5.2]

Lyn: [00:46:50] Yes, I have no single source. I think I think Twitter is the best for news. Unfortunately, the news sources are slow news comes out on financial Twitter before it comes out on any of the major news networks. From a kind of quantitative perspective, I often use why charts for a lot of my fundamental analysis. And I also use a tool called Fast Graphs for a lot of my fundamental analysis on stocks so people can check those out. [00:47:13][22.9]

Alec: [00:47:13] Maybe not one. You say, unfortunately about Twitter. I think I think fortunately, I think it's a it's become a great resource that that didn't exist exist for investors, you know, in generations before us. [00:47:25][12.3]

Lyn: [00:47:26] Yeah, I agree. I guess the reason I put it, unfortunately, is just because you have to kind of know how to use it. Right. Because there's there's so much kind of junk on there. If you had good filtering processes to actually follow the right accounts, you can get a lot of professional level information. I mean, there are a portfolio there. You know, they're hedge fund managers. There are people that focus on reporting the news and there are all sorts of resources on there. They can be extremely valuable. The fact that a lot of mainstream news just tends to have a very narrow focus and doesn't cover things very quickly. So it's kind of the fact that so much news comes out on Twitter so far before or, you know, any other news source is kind of interesting. So I do think it's a very valuable tool if you know how to use it. [00:48:05][39.0]

Bryce: [00:48:06] Other than the Equity Mates account on Twitter, would you recommend following any other accounts for our audience? One of the questions that always pops up is who should we be following on Twitter? So I'd be interested. Is there an account that you find particularly interesting? [00:48:19][13.3]

Lyn: [00:48:20] I would say not of top my head, but if anyone goes to my Twitter, I only follow like 70 accounts. And so it's kind of a high signal to noise ratio. And so a couple I follow for news, there's usually a specific reason, kind of each one covers a different area and it's not even all people I agree with. Right. So it's important to follow people that you disagree with but that are still valuable. Right. So they're still intellectually honest. They report facts and you might see things a different way. So it's not like I like my follow list is not a collection of people I agree with. It's kind of a collection of useful information. And, you know, it's like it's probably like sixty seven financial accounts and like three like cat accounts like that. [00:48:56][36.3]

Alec: [00:48:58] Yeah. When the last question that we always like to interview with is if you think back to your younger self, when you first bought that box of gold and silver coins or when you first made your first stock investment in Adobe, what advice would you have for the younger self? [00:49:15][16.7]

Lyn: [00:49:15] Just keep learning because, you know, a lot of those initial investments were imperfect. No, I didn't fully know what I was doing when I bought Adobe. But the curiousness to keep learning and to keep researching. And whenever you have a question, go look it up and kind of look at it from multiple angles and just kind of keep iterating and building that knowledge over years and decades. [00:49:33][18.0]

Bryce: [00:49:34] Love that line. It is all about the the lifelong journey. [00:49:37][3.0]

Speaker 1: [00:49:38] So great way to finish the interview. [00:49:39][1.6]

Bryce: [00:49:40] And we absolutely thank you for your time today coming on Equity Mates and sharing your thoughts on what's going on in markets and asset classes around the world. So very much appreciate it. We look forward to seeing how that bold prediction Bitcoin pans out over the next 18 months or so. We do have it on record. [00:49:55][15.8]

Lyn: [00:49:57] Yes. And what we know right now, we're guaranteed to have a Bitcoin crash and it tends to crash. So whatever I said, just, you know, do your own diligence look. [00:50:07][10.6]

Bryce: [00:50:08] Yeah. So we very much appreciate you coming on. Thanks for your time. [00:50:10][2.4]

Lyn: [00:50:11] Yep. Thank you. [00:50:11][0.5]

Speaker 3: [00:50:12] Thanks a lot. [00:50:12][0.0]

[2852.3]

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Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

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