Welcome back to episode number 11 of the Meet Kevin Report: We are going to hop over and listen to some comments here starting with Ray Dalio talking about how people aren't paying attention to the long-term debt cycle. Let's start this. this is live and then we'll get to coverage. Thanks right? Okay, then you bring things down.

Okay, now in this, each one of these. Cycles You bring them down a little bit differently. What we're what we have here is that there was quite a lot of bubbles in this so you could see which sectors are going down. You can see which stocks are going down right? You see the tech stocks, you see the you see real estate going down.

Um, residential real estate goes down. But doesn't mean that their families are hurt because the household sector is in a better financial position than it ever was, because it has received a lot of money and also they're benefiting. When we say inflation and you say wages are going up, you see those, their sector they're They're basically benefiting. So you're seeing this type of contraction.

so it's going down and we're having something close to a stag. Let's say a stag flacia. meaning maybe three and a half. I Think you're going to see inflation come down to this and then because of the way it's calculated, it'll go up a bit.

and so you see that kind of in a an environment with something close to maybe a one percent growth rate, right? Something like that, right? Can this ask you a very Baseline question though? Yeah, right now this. Market Depending on how what you think this Market is, does it actually believes that inflation's coming down really coming down? I Think that Yeah and they don't believe Jay Powell to some degree. Well, I Don't think they believe I Think what you're referring to is they don't believe what's in the curve. Or in other words, what's in the curve is a significant easy right? What's and what uh Jay Powell is saying is steady right? Believe steady? You're saying believe steady? You're saying believe what? Jay Powell is saying right? right? I Think because it's the nature of a yield curve and the discounting thing.

Uh, slope of the yield curve because both markets are trading. So when you have a bond market trading with a short rate, then you can get that curve. It's not necessarily because everybody's smartly plots that out. So I Don't think I Don't think you're going to see an Easing that is built into the curve.

So that means that you're going to see I look I'm not I'm never sure I'm right. but I I Think you're not going to see an easing that's equivalent to the Building Bully I Think believe Jay Powell There's no good reason. Even if you look at the bond price, let's say Bond Pro Bond yields 3.4 3.5 Let's say you had a two percent inflation. That still means only a 1.4 real rate.

which I don't think so when you look at the bond rate, the bond rate looks like a low rate. Um, of course there are big credit spreads on that. But anyway. so I I think that you're not going to see the easing I I Would say that that's probably the easiest.

One of these is safest bets that you're not going to see that happen. I Don't know. Maybe I'm wrong, but I don't see that's that's a big anti-trend bet there. We'll talk about it.

That means that that's not built into the curve. That's an uh uh, you know what a headwind. How do you think about trades that take advantage of that discrepancy in view that that we will be higher. If you believe that you will, you believe that we will be higher for longer even though the markets do not.

That's true. Markets are positioned for that latter scenario. So what are the trades that take advantage of that discrepancy? Well, it's just short. Tech you're I mean well.

it's like the Pure Play is straight on the yield curve. the Pure Play Straight on the yield curve I wouldn't Um, of course interest rate changes have impacts on other markets and so on. But if if you look at the relative pricing now of let's say cash, let's start with cash and then you go out on the yield curve and you look at that. Cash is relatively attractive in relationship to even to equities.

but when I say equities, there's such a range of the type of equities that we're dealing with and then we're Uh, so I if you want the Pure Play you're in, you're in that pure play. um I Think the interesting question um has to do with the areas that have cracked and then passing them through private markets because what's happened in um, you know the public versions of them are down. Then if you take the private Market venture capital and um, you got a problem there. Okay, you've got the mark to Market question and then a lot of these companies.

um, then they they don't have enough cash and then if they have another down round, another down round is really a problem for not only them as a com as their companies, but also for those who are holding them Venture capitals and private Equity That's a big one. We're going to talk about that big warning. Um, problem there. Um, so that's hard to figure out exactly how that's going to play out, but that's going to be a sort of stagnant thing.

But I Think that this type of recession is not a bad recession. It's a lot less bad than I Thought it would be because of the fact of How It's Distributing and and shrinking that credit at the same time. Though, we have a real issue for the United States debt in the world because we're selling all this selling all this debt. You know if You look at wealth instead of GDP wealth is a much better indicator of of things.

GDP is like looking at revenue on how much did you sell. We have more of a lot of money. Okay, and now we're having a problem selling that money around the world, right? And we're and it's also happening that this political situation geopolitical situation is weakening the demand for U.S Bonds? Well, we just were. we're talking about.

You know what a previous Fed chair called the Conundrum of lower long-term rates. That means there's a lot of demand for longer term treasuries at the moment anyway. Um, and you know the FED balancing's down by half a trillion dollars from the peak. And here we are not worried too much about about financing things.

Why do you think that's becoming a critical issue? Well, because if you're still looking at the amount of debt deficits that we're running right, if you're still at and that's a current account both both the trade deficit, you still have to sell a lot of bonds to the rest of the world and for a variety of reasons. Um, besides that being a lot and it's being monetized. Okay, so who's the other side of the balance sheet the other side has met, The balance sheet has been monetization except for just the most recent moment, and that just even chronologically is going to worsen then you. That generally means the US right? you're playing, playing, a role.

In other words, Sanctions have caused a lot of countries to be concerned that they could possibly be sanctioned. And now the the split is. Um, there's an internationalization of the Remnb, a lot of Um trade and capital flows, isn't it? remmb and China has never chosen to denominate a net reminbi. You're now seeing that happen.

So the amount of if you look at let's say the purple portion of not only reserves but Sovereign wealth funds denominated in dollars. It's a lot that that is tilting in a certain direction. And then if you look at things like um, you know the question is will we deal with that debt and and what there is the debt ceiling. Um I mean everybody believes we'll get through the debt ceiling, but the question is if you get through the debt ceiling, is that a good thing or is it a bad thing? it just means a pile more debt.

So the supply demand I'm going to pull off Ray Dalio here for a moment because I Have to say I've been listening to is we're in the ninth inning of uh of an economic expansion for like the last four years and now he's saying we're halfway through the 13 inning cycle. I I don't I don't really know where we are anymore. We went from cash is trash to cash is great and I'm not saying you can't change your mind I think it's a good idea to change your mind? Heck, I changed my mind all the time. Uh, but I Want to break down a little bit of what? Ray Dalio is uh, arguing here Ray Dalio is our arguing that he does not actually think the treasury market will soften the way it has been or in other words, will continue a long Trend Now that's really interesting because it has big implications, especially for the real estate market and potentially the stock market.

After all, if treasury yields go down, consider this for a moment. Treasury yields go down. What is treasury yields going down mean? what it means is more people are interested in stocks because you're not making as much money on Treasury yields. What does it mean when treasury yields go down? Real estate goes up right, so yields down.

Generally you can get a higher return then with lower yields from stocks and real estate because mortgage rates are lower supporting higher asset prices. Redalio is making the argument that he doesn't actually think we're going to see a substantial easing in the treasury market. maybe any further than it has already eased given that after yesterday it dropped about 11 basis points on for example, the 10-year Treasury and we've been on a pretty clear Trend down. I mean I've got a chart up here of the 10-year treasury, basically peaking out right around mid-october Uh, that's uh.

that's right when we bought a crapload of treasuries, about 21 and a half million dollars worth of treasuries for uh, house hack and uh. And and we got this this solid Trend down in, uh, in treasury yields. Which means if you uh, bought bonds over here, those bonds are more valuable today than they were then, which is great. Uh, you're locking in higher yields.

But anyway, Ray Dalio doesn't actually think this trend will continue. He thinks, hey, you know what? Look, if you're investing in the 10-year treasury, you're only getting rewarded even at two percent inflation. somewhere around 1.3 for investing in treasuries. That actually makes having cash pretty desirable.

So he's actually now talking up trash talking up the idea that yields will stay high. but even as inflation is, two percent yields will still not be high enough. And if anything, they should go higher. Very, very different opinion.

Uh, than uh, certainly what I have or what a lot of folks I see have But it doesn't mean he's wrong. but let's listen in. it's definitely unique. We'll go back to him.

all the things well what happened was. um, so let me take the sequence. Uh, just before there was, uh, the summer and we were looking at the Ukraine the United States was thinking about sanctions on China and how China would operate. And then there was a lot of studying about what would the implications of sanctions be and the implications of sanctions Would be economically disastrous.

If you wanted to see an inflation, it was what came out of Russia would be nothing. So there was a hesitancy and then Pelosi went over there and when Pelosi went over there, that was the bottom. In my opinion, that was the bottom of the of the relationship at that moment and China had to do a demonstration. It was.

and and then since that point, there's he's talking about Nancy Pelosi going to Taiwan last August Please don't take it that I'm either I'm confident about any of these things as I say maybe there's one in three chance over the next 10 years of those kinds of things depending on how things transpire and that's a very dangerous thing. The fact that that I can say that and everybody almost can is living that is causing big changes in flows. It's causing big changes in who what businesses are operating, where businesses are leaving those places. we should talk about the good places.

India is benefiting Indonesia's benefiting right? Um. Asean countries are better benefiting um Saudi Arabia and um uh UAE is benefiting So you're seeing these other places. You have to see how wealth is Shifting right? Wealth right? If you If you just look at how wealth is Shifting you're seeing big increases in some places and big decreases. He's not wrong.

You are seeing a high net worth individuals flow their money out of China a lot more outflows than inflows are getting into China because people are worried about those geopolitical issues. so you are seeing uh, uh, you know, even Vietnam uh Cambodia Singapore Philippines all benefit fitting from these outflows from China needs to be more spending than we have income and that's a problem, right? Governments run the same as your household or a business and the problem is they don't. So Ray Dalio is making again the argument that hey, well, you know you should balance uh, your your debt to your spending like don't spend more than uh than you make and and that traditionally is very accurate for uh, personal, uh, individual, if our household, or for a business you got to balance, uh, balance the books so to speak. But in America we have this crazy phenomenon where basically we could continue to print money and uh, borrow more money.

and as long as people trust the dollar, the House of Cards keeps building and it's politically beneficial because it continues growing. GDP What? Ray Dalio is basically warning of is in the future the House of Cards will collapse And he's not wrong. There has never been a currency in the history of civilization that has not collapsed, so in the very long term he will be right. Eventually, the dollar will lose and the debt will have to be repaid or just all collapse and we'll start over with a new currency.

He's not wrong, but is that this year or next year? probably not. Is it this decade? Probably not. Is it after that? eventually? Yeah. I Think we invest nearly as much in in the basic things like great education and making sure that certain areas that do not have conditions that are substandard conditions in it.

So to invest in those things that are going to produce productivity as education is a good thing, infrastructure is a good thing. Other things, it's a it. This is part of a cycle. A big cycle that has happened over and over and over again where you know you you the productivity goes down in that cycle.

Can I just ask? There's a there's an op-ed today from Charlie Munger We always talk to you about Crypto I Don't know if you saw this op-ed He effectively said that crypto should be outlawed. Just an excited communist. China is having taken a wise move by doing that? Yes, you have been I believe a supporter of Bitcoin uh or at least yeah, uh. Curious Crypto.

Curious. Okay, where where has anything changed for you in? Um, yeah, just everybody. Let me. State What I believe about the group time with um Bitcoin and what? I've I you know pretty much uh, always pay I think it's been.

You know, quite amazing that for 12 years it's accomplished. But I think it has no relation to anything. Okay, in other words, it moves. It has no relation.

It's a tiny thing that gets a disproportionate attention. You know the value of Krypton Crypt uh Bitcoin is less than a third of the value of Microsoft stock. and you could go into Industries Biotech and many other Industries are more interesting than Bitcoin. It's not going to be an effective money.

It's not an effective store holder wealth. It's not an effective medium of exchange. But we are in a world in which money as we know it is in Jeopardy right? We are printing too much much. And it's not just the United States all the reserve currencies the year.

What's going on in Euroland, What's going on in Yen And so in that world, the question is, what is money and how's that going to operate? So when we look at something like China's Remnb and then you take the digital WebMD um I think you're going to see that become more and more a thing. So when when things start to open up in an evolutionary way, people are going to start to say where is my safe uh, storehold of wealth and as you have China denominate more of its trade in Remmb, then naturally those who are going to hold Remedy if Saudi Arabia sells oil and REM MD and then buys things from China in Remnd when they get it, they're going to hold more Remedy. It's going to be a higher percentage of their and so um, I think the question over the next number of years is really what is money not just as a medium of extreme change, but a storehold of wealth. That sounds like a argument for Bitcoin or for something maybe I think if you want to, if you want a digital currency, you have to deal something different I Don't think that the stable coins are good.

uh uh because then you're getting a fiat currency again I think that what you really would what would be best is an inflation linked um, coin right? In other words, something where basically you would say okay, this is going to give me mind power because every individual wants what do they want. They want to secure their buying power if you want to save. now if you put it in Bitcoin It goes like this: who knows what happens if you put it into something. the closest thing to that is an inflation index Bond and so on.

But if you put uh, if you created a coin that says okay, this is buying power that I know I could save in and put my money in um over a period of time and then I can transact in anywhere I think that that would be a good coin but you so I think you're going to see probably the development of coins that you haven't seen that probably will be end up being attractive viable coins I Don't think Bitcoin is it so I Want to go back to the markets before we let you go. It sounded before like you thought cash is Cash is King Right now out of all the choices that you can make, um, where do you think the stock market is? Do you think that we have priced in what could be, uh, you know, a recession or what is a recession? Did we see the worst of it in October Where are we right now in terms of value? I Think that first of all, when we talk about pricing in the recession I Think the first thing you have to do is you've priced in the discount rate. So what has happened? the most important thing is you've changed the discount rate. Every investment is a lump sum payment for a future cash flow and you put in the discount rate.

So now you've moved the discount rate. That discount rate is not going to be materially changing right? So we're not going to go back to the old discount rate and prices are not going to go back to where they were. Then you start to have the knock-on effect on the economy. I Mean to me it looks like on on that that you you know you have something, um, substandard growth, right? You have that uh, what we call a recession we have I Can't tell you.

is it one percent growth or something like that, but it's a fairly stagnant growth that is not hurting the household sector as much as you would think in terms of that, so that becomes tolerable for longer which I think keeps that So then you look at the if the markets as a whole, the markets as a whole look, um, um, they were obviously um I would say the interest rate changes were obviously a had to come. The impact on the other markets had to come. They have come. They have been into the price so now you're going to have probably a tightening or a tighter monetary policy than existed and that's a net negative for the stock market, but not in such a big number that it's like a big bearish thing.

So when I look at the market as a whole I would say okay, well now it seems closer to fairly price. probably still a bit. High given that whole picture right Ray Dalio, we need to thank you. You got to come on back because I want to hear more about your new life post uh, post uh, co-cio role.

but uh, we're out of time. But thank you for uh, an education this morning. Thank you All right So let's give a little bit of a recap here of what we just heard from Ray Dalio, as well as talk a little bit about crypto. So Ray Dalio no longer thinks that cash is trash Ray Dalio now actually thinks that cash has a substantial, uh, potential opportunity premium over really any other kind of investment.

And that's mostly because Ray Dalio thinks that U.S treasury yields should remain high and are likely to remain high. This is exactly the opposite of the trend that we've been seeing in treasury yields. Treasury yields have been falling since about October and mid-november when we sort of had a double Peak on the 10-year treasury. They've been straight down since then, we peaked out around four and a quarter now is sitting at under four and a half 10-year treasury yield at the time of this recording setting at about 3.38 after dovish comments from Jerome Powell.

So so far, this trend is inappropriate to suggest that, well, a treasury yields will actually stabilize. I Think this is because Ray Dalio doesn't really believe Jerome Powell and the Federal Reserve are going to cut interest rates and instead believes that you've got to keep interest rates. High Maybe you shouldn't actually extend the debt ceiling, because after all, you should operate the government like a business or a household. which on one hand makes sense.

That's relatable to us. We shouldn't spend more than we make. But on the other hand, the reason politicians spend more than we make is because it promotes growth. And when we promote growth, we are not in a recession.

Businesses grow, people flourish business. Businesses are able to expand, People are able to start new businesses, households build their wealth, People are able to buy a home to live in rather than renting for their entire life, which I'm a big fan of. Obviously, building your wealth through investing in real estate and so, governments are clearly incentivized to actually, yes, spend more, uh, than they make. That's why our debts go up now.

eventually that'll collapse. So again, there's been no currency in history that has survived. In other words, they all collapse. It all ends up being a House of Cards.

Is that a House of Cards that we have to worry about within the next few years? Probably not because the dollar is still one of the strongest. Probably I would, well, I think arguably the strongest currency in the world. And if anything, Decisions by the Bank of England Today, where the Bank of England is expecting uh, a, uh, a recession, a mild recession. But they are expecting a recession out of G7 countries statista shows that uh, the United Kingdom might actually be the only G7 country to fall into a recession.

But what did the Bank of England do today? The Bank of England actually hiked rates by 50 basis points. Uh, hiked rates right which were not fully priced in leading to a rally in the pound. uh, or the pound sterling. And the reason you get this and the reason it matters to the dollar is because the more other countries Everything's Relative You have to remember that when it comes to currencies, okay, the collapse of the dollar would probably be the last collapse of currency you would expect.

You would expect the Turkish Lira with over 60 inflation to collapse way before the US dollar. Obviously right. We would expect a collapse of many other currencies well before we would expect we would expect a collapse of the Euro before we would expect collapse of the US dollar. But when we look at this relatively and we consider that if the United Kingdom is the only one expecting a recession uh, as uh, the bank of England continues to fight High inflation and they continue to hike more than expected, what ends up happening? Well, you end up driving up the yield of guilts which are basically treasury Bonds in the United Kingdom And when you drive up the yield for those, you actually lower the demand uh for for uh, uh, you know, treasuries, uh, and and the dollar and other bonds around the world.

And on one hand, when you lower demand, uh, four bonds over here and you potentially lower prices here. on one hand, maybe Ray Dalio could be right in that. Okay, well, if you have less demand for Bonds in America, yields are going to stay a little elevated because higher yields will help increase will help increase demand. essentially.

and if rates are expected to be even higher in the United Kingdom, you might get less demand in America and more demand in in sort of the United Kingdom or other countries. Now the reason that matters. It's basically to say that in the short term. Yeah, maybe we'll see some stability around the threes.

But here's where in my opinion: Ray Dalio's argument falls apart for treasury Bonds in America, Which is really important because as treasury yields fall, we expect stocks to rise and we expect real estate to rise again. Here's where in my opinion, his argument falls apart. It falls apart as soon as we start realizing that yes, indeed, the United Kingdom is going into a recession as inflation hopefully gets Stamped Out of the economy. much like we've seen, that disinflation process start here in America.

If we start seeing that also happen in the United Kingdom, probably start seeing International yields for all all bonds start falling. And that's because as inflation goes away now, more folks can start buying U.S bonds again. And that's exactly what people are doing. and what does that do? It drives up the price and lowers the yield.

Eventually, that'll happen in the United Kingdom as well. You get a temporary boost in yields because you're seeing higher rates than expected from the bank of England, But that too will go away eventually. So the long story here of where I'm going with with this inflation fight is as Inflation Falls Throughout the rest of the world, we do expect yields to Across the entire world slowly fall and I think that kind of counters. Uh, some of what Ray Dalio is suggesting that.

Oh, we're not going to end up seeing yields go down. In my opinion, the only way you don't end up seeing yields go down is if inflation continues to run hot. Which don't get me wrong, it could absolutely pop up again. But I'm not convinced about Ray Dalio's argument that yields are going to stay high and that maybe it's better to be in cash versus being exposed to some of these yields.

Now for an institution, treasury bonds might be a great way to farm three and a half to four percent yields for an individual. I Think one of the best ways you could Farm Yields right now quite frankly is just looking at companies like Wealthfront or Robin Hood not sponsored. Uh, but uh, you know these here are companies that are offering you four to four and a quarter percent. I think so.

Finally, it's at 3.75 or four percent. Why would you bother with treasury bonds if you can get FDIC Insurance up to 500k or more throwing your money into one of those accounts I think wealthfront or uh, and even Robin Hood potentially lets you get FDIC Insurance up to a a million dollars or more by basically splitting your money up amongst other individual. Banks So that way you're sort of getting 500k at each. Bank Depending on how many times they do, it is how much FDIC Insurance you can get.

So uh, you know I'm I'm not convinced that Ray Dalio's argument is uh is is super, uh, accurate, at least not at this point. Maybe at some point in the future when currencies collapse that that'll be uh uh, the time. his arguments will be right. but I'm not convinced that the debt cycle is ready to end.

uh, just yet. Uh, so again, it doesn't mean you're building a house of Cards. But what did Ray Dalio have to say about Crypto? Well, one of the things I thought was really into interesting about his arguments about crypto was that one of the best things that we could potentially see for crypto would be some form of inflation linked coin. something that gives you a secure set of buying power now.

Uh, obviously immediately what comes to mind here is Bitcoin because of the limited Supply that Bitcoin has and the theory that in the longer term uh, essentially Bitcoin should be uh, a a large inflation hedge because there's a limited supply of it that should help squeeze the price up Kathy Wood Highly believes in her bull case that Bitcoin will become a digital gold and if it becomes a digital gold and we even get a 40 percent adoption of the gold market for uh Bitcoin Essentially so moving from gold to bitcoin even if you get that 40 adoption plus some other aspects that she thinks are bullish for Bitcoin uh for for its Network effects and otherwise uh, she, she's got a one million dollar price target for Bitcoin. So I on some you know, count here I'm I Feel like Ray Dalio was slightly describing Bitcoin via an inflation length coin without describing Bitcoin but suggesting you should have some kind of inflation protected coin that people being able to preserve their purchasing power would be useful. Now he argues that Bitcoin's too volatile and it's only about a third of the market cap of Microsoft. but I think a lot of crypto Bulls would argue.

That is exactly why maybe now would be the time to buy Bitcoin It's an interesting idea and it stands in the face of what Charlie Munger says Charlie Munger Obviously Warren Buffett's uh, co-star dare I say and uh Charlie Munger wrote a piece in the Wall Street Journal Today it's an op-ed and it's titled why America should ban crypto Charlie Munger says that in recent years, privately owned companies have issued thousands of new cryptocurrencies, both large and small, and these have later become publicly traded without any government approval or disclosure. In some cases, Big Blocks of cryptocurrency excuse me, are sold to a promoter for almost nothing and then sold to a with a substantially higher value later uh to the public without the public understanding how dilution works now. I Think this is really useful because Charlie Munger is right. most people have no idea how dilution works and how terrible it is when it comes to investing in companies.

And unfortunately, it's a sad reality that most people don't understand it. And this is how people make a lot of money in the stock market. It's through uh, companies going public or a coins going public with substantial dilution. I Think an easy way to explain to you what a dilution is is giving you an example.

Let's say I create the MKC We're going to create it together. Okay, let's say we create the Meet Kevin coin and uh, what I'm going to do is I'm going to create uh, 1 million coins and what I'm going to tell you is that on the market I'm only going to allow 1 000 of those coins to sell and I'm going to sell those coins for one dollar. But keep in mind, my costs to create the Meet Kevin coin were ten dollars. So in other words, excuse me if I created a Meet Kevin coin for the cost of ten dollars.

I only put ten dollars into creating a million coins, right? And if I now limit the float float is a very important word. In fact, it has a lot to do with the Adani disaster that's going on. When you limit the float, you could really increase the value of each share or each coin. So if I say listen, we are only going to have 1 000 coins available for sale and if you want to meet Kevin Coyne you have to pay a dollar for each of those coins.

Well, in this example, I get about a thousand dollars in cash, but you have been substantially diluted by the fact that there are another 999 000 coins available. Which means on one hand, you've actually just created a million dollars in value. You turned my ten dollars into one million dollars in value. And the reason you could be diluted is because while there are now a thousand coins outstanding, I could take another thousand and start selling them again for another dollar.

or maybe even 80. Sense, whatever it is, but because of those prior sales, people believe. Ah, okay, this is about where the market value is and if you slowly trickle them out, you essentially dilute the base and you can make lots of money. This is essentially what Charlie Munger is saying and it's the same thing that companies do, right? I mean think about it from a company.

example here: If you go to somebody, uh, and you say hey, look, I own a hundred percent of a company and I'm into it for I don't know, 50 million dollars, right? I'll sell you 10 of this company for uh, let's say 25 million dollars. Well, what I've just done is if I sell you 10 of the company for 25 million dollars. What? I've just done is valued the entire company at 250 million dollars. In other words I Just 5xed the value of the company by selling a small slice to somebody else for a substantially higher valuation, right? This is the same thing that happens in crypto.

It's the same thing that happens in the stock Market There's really no different from that. I think Charlie Munger Here is just making the argument that most people don't understand that kind of dilution that favors the original creator of the coin because there's a lack of disclosure. Although I could tell you this, there is a massive lack of disclosure in Uh in most of the specs that we've seen. In fact, most of the Spacs have had these insane and glorious projections, only to end up proving to us that none of those were even remotely accurate.

Uh, and it's unfortunate that even spax are able to get through the Sac and the regulatory process and end up creating the same dilution that Charlie Munger is talking about through technically the official processes. Although Here Charlie Munger goes as far as saying that because of this lack of disclosure and lack of dilution awareness from individuals, cryptocurrency should basically be banned. He goes on to say that crypto is not a currency. It's not a commodity.

It's not a security. Instead, it's a gambling contract with nearly a 100 percent Edge for the house. Now, I would argue that with the case of let's say like a Bitcoin there really isn't much of a house given given how just decentralized it really has become. But uh, sure, I I would argue he's not wrong when it comes to smaller coins that are created.

Yeah, there's probably more than 100 Edge for the house, The house wins through via that dilution that I explained. Uh, and so Charlie Munger actually goes as far as praising China for Banning cryptocurrencies, concluding that cryptocurrencies provide more harm than benefit and he says that, look, the English Parliament did this in the 1700s when companies were basically uh, uh, exhibiting this. This cryptocurrency-like Behavior Uh in early stock listings in the 1700s, and when England banned new stocks uh from publicly trading for about a hundred years. uh, Charlie Munger suggests that the world was actually able to progress substantially from the enlightenment to the Industrial Revolution to the creation of the United States.

So in other words, dare I make this slippery slope analogy. although I didn't make it Charlie Munger Actually, I did. I'm just gonna say it in a different way. Charlie Munger is basically saying if you ban crypto, you'll be able to create a new United States Uh, that's that's how extreme of an argument he's making.

He's basically saying it's so speculative and such a robbing of value from people that you potentially eliminate the opportunity to create something as great as the Industrial Revolution or another. United States That's a pretty big argument there. Uh, by Charlie Munger Uh and uh. I Don't know how I.

feel about it, but I'm curious to know what you think about it. Keep in mind Kathy Wood's got that one million dollar price Target on her bull case for Bitcoin Uh and uh. Ultimately, you have going back to Ray Dalio Ray Dalio suggesting that stable coins are not great because they're kind of like Fiat which is interesting because the good stable coins are actually backed by one dollar of Fiat. So maybe he's not necessarily wrong with that.

except it's harder to print new stable coins unless you get an inflow of new dollars. So potentially there is a difference there. Since we're not printing new stable coins unless of course, your 10 other, then we don't really know what's going on. Anyway, this is an interesting point of view from Charlie Bunger That's an interesting point of view from Ray Dalio.

Honestly, I kind of wrapped this one up by saying I don't know if we're just listening to two old people fuss about things that they just don't like. Ray Dalio doesn't like the government printing money and again, a lot of people don't and think the government should run a balanced budget. Is it going to happen anytime soon? Probably not. Charlie Munger is complaining about cryptocurrency.

Not a surprise he always has. Is he correct though when suggesting that dilution is a big problem for initial investors and things abso freaking lutely. This is why with the company that I my startup House Hack, we're actually selling shares at one dollar per share for every one dollar of cash that we have. So basically, the company is worth one to one.

They're oops, There is no pre-dilution Uh, you know we. We could go in and say, hey, we're raising 50 million dollars at 150 million dollar valuation, That would make your shares essentially get diluted down to 33 cents, right for every dollar you put in. But that's not actually what I'm doing with my company at House. I'm purposefully preventing that pre-dilution at House Hack.

Uh, read the solicitation at Househack.com by making sure that if we raise 50 mil, the company's worth 50 mil. If we raise 75, the company's worth 75. Uh, and and I'm doing that. In my opinion, it's sort of like a well.

it's twofold at one: I think it's a gift to my subscribers. uh, and and the people who believe in me. But number two. It also gives me the opportunity to prove myself that that I can build this company uh, and turn it into something really incredible.

So that way, when the company actually gets a market valuation which is generally a multiple of your book value uh than uh, than those people who initially invested in me win, Uh, and uh, everybody wins Who's involved. So I'm a big fan of that. But anyway, it's interesting to consider that that pre-dilution argument uh, I don't know if it rises to the level of banning all crypto, but don't get me wrong, there are a ton of lame, smaller scammy coins that we want to be careful of. so what else do we have? Well, there's a lot to cover, so let's get into the rest.

So that was Uh Banning Crypto and a Ray Dalium right now. If we do a quick check of what what's going on in the pre-market here in the pre-market we have let's see Bonds uh, 10 years sitting at about 3.39 you've got down negative by about Uh Point uh, by about a third. But the S P Futures up about half and Nasdaq futures up about Uh 1.5 percent. Tesla on the pre-market here up two percent, trade desk up about five almost six percent.

Uh. And then you also have smaller companies that are starting to Rally quite a bit like Carvana Bed Bath Meta. Uh, and some of these others. well, Meta not being a smaller company, but Carvana Bed Bath Rally actually.

I Think it's worth mentioning something about Carvana and what Ray Dalia mentioned. Uh, Okay, yeah. Another thing that Ray Dalio told us was a warning that companies with low-free cash flow in any minor shock that comes up are going to have to raise a lot of money, and you could potentially see very quick collapses of what he calls bubbles occurring in certain markets Now I Think this is very accurate, especially in the private Market where you actually haven't seen a lot of those valuation adjustments yet. But one of the issues that you have in a recession is you have a lack of cash, you have a lack of liquidity and this is one of the reasons I think Ray Dalio is suggesting hey, cash is a good thing, but what I think is remarkable is Ray Dalio is really providing a warning to the people speculating on companies like Carvana and Bed Bath companies that are really heading towards bankruptcy.

Yet here in the pre-market Carvana for example is up 27 and Bed Bath and Beyond is heading up 25. These are generally unsustainable moment rallies where the reason we get increases or spikes in these stocks is solely because more people are buying them as maybe somebody's manipulating you know, a sentiment on stock twits or whatever. Uh and uh, what's great, uh In terms of a warning is when Ray Dalio says, look, companies that have low free cash flow are going to have to go to the capital markets to raise money, He's basically providing a massive warning that companies that are trending towards bankruptcy because they don't have free cash flow in a recession or companies that are going to suffer bigly in any kind of future little hiccups that pop up and I think he couldn't be more right? Obviously, right now, markets are a little bit euphoric after. Jerome Powell is suggesting that the process of disinflation has started.

But there's a reason why. my goal in investing really for the last six plus months has been to focus. Actually, probably more like a year six to six to 12 months, my goal has been focusing on High Free cash flow companies that, uh, that have low liquidity risk or needs to go to the market to raise a lot of money. So high free cash flow companies those with margin or those with pricing power in my opinion are companies that I really want to focus on.

And so I think Ray Dalio's warning really reiterates something to keep in mind. All right, let's say what Bloomberg has for us: Okay Let's listen. In here it goes from 275 to 325 and the depot rate goes from two percent to 250. I Have to say I Never thought we'd get here, but here we are 250 and we break back through 110 on Euro dollar.

the headlines are going to keep coming out Lisa you go through them I'm going to bring up the statement and we'll work through this together. Yeah, I'm looking right now at a meeting to meeting approach to further rate decisions. I'm also I find it interesting as they talk about continuing to uh, roll off the app portfolio. It's starting to fall from March so we'll have to dig into what they say about balance sheet types of action.

Also saying that rates still have to rise significantly and at a steady Pace This is the hawkish uh kind of tilt that people were looking for, even as they reiterate some of the other Uh rhetoric from the last meeting. So here's a statement for you: The Governing Council will stay the course in raising interest rates significantly at a steady pace, and in keeping them at levels that are sufficiently restrictive to ensure a timely return to inflation to its two percent medium time. Target Accordingly, the Governing Council today decided to raise the three key ECP interest rates by 50 basis points and expects to raise them further in view of the underlying inflation pressures. The Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.

So never mind the end of forward guidance. that's basically a commitment to go 50 basis points in March. They go on to say keeping interest rates at restrictive levels will over time reduce inflation by dampening demand, and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council's future policy rate decisions will continue to be data dependent and follow a meeting by meeting approach.

apparently just not the March meeting because that'll be 15.50 but everything after that is meeting by meter I Wonder how much guidance they got from Fed Chair J Powell Basically, if you want to be hawkish, you've got to give specifics and you've got to push back. Basically saying, don't even pretend that we're going to step down, we're not stepping down. Let's go. And how much is this? Basically the guidance they're giving to really, uh, shake the market into acquiescence.

Let's work through the price action Off the back of it. looking at German Bund yields lower at the front end by seven basis points 257 on a 10-year the lower by about 10 or 11 basis points. Bear in mind that yesterday we had a big rally in the bond market in treasuries too. You, but yield to lower in Germany and they stay lower.

Looking at the FX Market Euro dollar, where are we? We can bring that up quickly for you, pushing through 110 earlier and then backing away at one zero nine ninety five so it's over you present in the guard time in about what 30 minutes time as you look at the yields come in. Italy yields came in as well I Don't want to make too much about it, it's sort of range bound, but to spread Italy as compared to Germany comes in a little bit. uh as as well. but it's the same thing as we saw with power.

it's a lower rate regime and I would translate that as price up is more important than the yield down. This is a pride. money moving in buying into the paper because of a trend that's out there. I Don't understand this, which is this is unabashedly pretty hawkish.

Basically saying we're going to raise rates for another 50 basis points, two meetings, 100 basis point increase after people said that they were never going to get off zero or even negative and you have bonds rallying yields lower and you have pretty muted moves. I'm just trying to to wrap my head around what the positioning was heading into there. Okay, so to explain what she's talking about here. So the European Central Bank basically just raised rates.

Uh, and what you have is when you raise rates, Generally you see bond yields go up, especially when rates go up more than expected at the central bank. But what's actually happening is yields are falling and people are buying more Bonds in Europe Which is really, really interesting because it's the opposite of what you would expect. so that's roughly what she's saying. Uh, that's quite interesting because that that is a little odd, so we'll especially since uh, they're keeping on that steady and hawkish tone.

It could potentially be that folks don't believe that the European Central Bank and Bank of England will be able to keep this sort of hawkish face on forever, which kind of makes us, uh, need to transition to the idea of what what's next for the Federal Reserve That's a big one. Let's talk about that. Sorry. All right, let's talk about what's next for the Federal Reserve After Dovish comments are from Jerome Powell yesterday, which were surprisingly more dovish than we expected.

I mean essentially Jerome Powell The more he talked, the more the market went up. Usually it's the opposite. The more he talks, the more the market goes down. And I think it's really important to start with an inflation discussion and what we really need to see happen in order to see Jerome Powell's dovishness continue.

So I'm going to show you exactly the sectors that you want to pay attention to when it comes to inflation coming down. It's not Goods inflation. We know that goods are already disinflating coming down and inflation rates. We know that housing and shelter is expected to start showing massive declines for inflation, which could help anchor the inflation reports down substantially.

However, Jerome Powell is concerned that when you look at inflation X Housing X Energy X food. Basically, you just look at what they call called a super core of services, which is where higher wages could hurt inflation. The following are the sectors that we're looking at on screen. Now we have water and sewer and trash collection Services Domestic services lawn mowing, repair of household items Medical expenses That's a big one.

Medical expenses sitting at about nearly a seven percent weight Professional Services Sitting at about a 3.4 percent weight Within that, that would include Physician's Dental eyeglasses Hospital Services Notice that in hospital services in the last CPI report, we actually got a 1.7 inflation read month over month. That's pretty high. That's pretty aggressive, though. we did get a substantial drop in Services by other medical professionals.

so Medical Care Services overall only increased about 0.1 percent, but if we see it a jump in that in future inflation reports, we could actually be setting up for potentially a negative inflation surprise. So I want you to pay attention to Medical Services Transportation Services Car and truck rentals have been plummeting. For example, vehicle insurances, public transportation including airfares. We actually kind of expect the potential for Price Awards to start coming to Airlines At least this is roughly what we gleaned from the United Airlines report, which is a way of potentially saying hey, look, if you get price Wars At Airlines we could continue to see airfares drop and public transportation makes up about a 0.9 percent weight on.

CPI reads: recreational Services Holding about a 3.1 percent weight, That'll be another important one to watch. Uh, we've got education and communication Services 5.3 percent weight admission to Sporting Goods Miscellaneous personal expenses uh, haircuts, apparel services, financial services, tax prep Services These are the sort of services that the Bureau of Labor Statistics will report data to to us, coming up here in 12 days on Valentine's Day and they're going to be very important for what the FED is looking at. So if you're looking at, okay, where do we want to be cautious? Where do we want to potentially pay attention for increasing prices? It's those Services sectors. so maybe pay a little bit more attention to what you're getting from companies that are reporting uh, service style Revenue So maybe pay a little bit more attention to the advertisers which we'll talk about later such as a trade desk or a Facebook earnings or Google earnings.

Maybe pay attention a little bit more to what we're seeing at those airline services and are we seeing any of those pressure subside. A lot of companies when it comes to inflation seem to be expecting deflation or or deflation or at least disinflation by the second half of the Year Giving you, for example, uh, the uh, consideration of even AMD suggesting that their Pipeline and this is a little bit more good style inflation, right? But for AMD at least we expect to see more discounting on the older pipeline of products that's disinflationary, right? helps bring our Goods costs down Pulte Homes Discounting homes more? Okay, eventually that feeds through. Pushing real estate prices down, pushes rents down, brings down that housing inflation GM Discounting vehicles more great. Maybe that discounted Vehicles which is a durable good, will eventually translate to lower prices in car rentals because if cars are cheaper to buy, then they're cheaper to rent out for Uh for for transportation purposes, right? Important Johnson and Johnson Procter and Gamble Higher inflation at the beginning of the year, but expecting lower.

but again, that's more on the product side. so we'll really want to start switching to paying attention to earnings for companies that are providing us services. And is it possible that technology companies could lead deflation in that sort of sector? Are we going to see lower earnings at companies like Adobe and Autodesk or software as a Services Company companies which basically Drive In put costs for a lot of service based companies and could those sort of reductions in price competitiveness lead to disinflation in those areas? Maybe, But is that going to change anything over at Medical Care Services TBD that's going to be a sector that we really want to pay attention to going forward, so we'll see. But beyond that, the Federal Reserve quite substantially excited about the disinflation that we're starting to see.

and Jerome Powell does tell us that he expects to start seeing disinflation start impacting the services sector soon. That is their base case that even though it's running a little hot right now, they expect to see it come down. uh, very soon when he doesn't know, so he doesn't want to come across as optimistic or bearish uh, or pessimistic should I say about what's going to end up happening with inflation in the services sector, But it's going to be a sector we want to pay attention to. Uh, and one of the ways that we could do this is again, when we look at earnings reports that come out, you want to see more uh, sort of, uh, belt tightening in terms of employment.

Nobody wants to see people getting unemployed, but the less wage pressures you end up seeing, the less pressures you might end up seeing on Services right? the lower cost that of, or the lower expense you have for hiring people who are going to prepare tax returns or uh, the lower cost for dental hygienists all end up meaning the lower prices that companies end up having to charge uh, their customers. And you can actually create GDP growth without substantial inflation. So we'll see. But what we got from Jerome Powell was relatively dovish yesterday and we are seeing a lot of signs of disinflation.

However, they create a substantial risk that if for whatever reason we end up seeing Services run hot like those that I mentioned, you could end up having a pretty quick downside in stocks in a pretty quick rally in treasury yields. So in my opinion, one of the things that you want to be careful of is uh, as much as I'm invested into the market and as much as I'm excited about the market going green because it's been, it's been, you know, quite a weight for the market to start rallying again. I Think it's important to, uh, look at your portfolio and say look, if if you've got margin, maybe maybe start taking a little bit off the table as we get into sort of a rally mode. or maybe you start seeing a little bit of a U-turn in the rally people start selling their alley a little bit.

Or maybe going into CPI on the 14th. Maybe you start selling just a little bit just to get out a margin and pay off your margin. have a little bit of cash on the side. So that way if we start getting any kind of inflationary surprises between which I expect there will be some inflationary surprises this year.

Uh, maybe then then you have more Capital available to buy the dip between now and say, the middle to end of this year. So some things to consider along with obviously what's going on with China Because another thing with China is as much as I believe the inflationary boost that we're going to get from spending in China is going to be somewhere around 1 6 of what we saw in America This is solely calculated by the excess savings that are estimated for the Chinese population versus the American population. Following the release of Covet lockdowns, suggesting that the Chinese have about one-sixth of the money that we had coming out of covert lockdowns, you still have the potential for surging uh, you know, surging demand in China leading to some kind of boost in inflation. AMD for example, talked about how and this is potentially a Counterpoint how they invested about one billion dollars in their supply chains to be prepared for a return to demand I Think a lot of companies are doing that.

so I think the Chinese have less money than Americans On top of that, uh, during the reopening. On top of that, I Think you've got companies that are substantially more prepared. This is my scrunch example. Companies are a lot more prepared for inflate basically a surge in demand now to prevent inflation than what we saw in 2021 and 2022.

Nonetheless, Bloomberg still argues that the Chinese reopening is set to provide a welcome boost to Global growth. However, it could also boost inflation as central banks are struggling to get inflation under control, and we could see that pressure on oil and gas prices, we could see that pressure on Commodities This is a very common trade right now is the belief that oil and gas prices are going to rise, that commodity prices are going to rise, and that really, this extra demand is going to fuel, uh, the the items. uh, in sort of our markets that we can't just create more of, we can't just as easily create more oil as we'd like. and we can't just create as much uh, copper as we want to be able to sustain some kind of uh reopening in China again.

I Think that reopening is going to have 1 6. The pressure of the United States reopening and ethics Supply chains is substantially in substantially better places than Uh now than where they were them. But you also have to consider that when the United States reopened, we were only sitting at probably somewhere around 200 oil rigs actually operating and drilling uh, at the time, whereas before the pandemic, we were sitting at somewhere between six to seven hundred and now we're sitting back at about 600. So you've even in the oil markets got substantially more rigs online now than you did during the reopening of the depths of the pandemic.

Because oil companies were hit so hard and had to take on so much debt to survive, especially when oil went Negative they ended up shutting down Rigs and laying off Oil Workers and it's taken a few years to get those folks back and to get rigs back online. In my opinion, that suggests that even with the reopening now, you could see a substantial absorption of Chinese excess demand without seeing substantial boosts in inflation. We'll see. Like I said, the biggest concern for inflation is going to be in that Services sector.

Yes, there's obviously going to be the concern about Commodities price inflation. I'm personally not concerned about that, but I know a lot of Traders are making bets on that I Think the biggest thing we want to pay attention to is the potential for higher Services inflation. That could be something that actually derails Jerome Powell's optimism. It's very possible that if Services inflation.

starts ticking up again, that the next summary of economic projections might end up being a U-turn Kind of like what we got from Jerome Powell between November and December in November Jerome Powell was pretty optimistic. Then in December all of a sudden, he turned hawkish again and we got the most hawkish summary of economic projections. uh, ever. Uh, in in this tightening cycle and that same kind of thing could happen again.

I don't think that's my base case. I would just call that sort of the edge scenario of uh as as exciting as it is that markets are running and I'm very happy about that. and I'm substantially benefiting obviously from from the market rally and I want to see that continue going on. I I Don't think it's wise to be, um, to think that inflation for sure is over.

Uh, there are still risks on the horizon. Uh, as we saw at the Bank of England raising rates 50 basis points today ECB racing rates 50 basis points. both of them talking about inflation risk being skewed to the upside: there are risks, especially in that Services sector. Now, is it possible that Powell the ECB and the Bank of England are as I've previously said, keeping on that hard mask to make sure that inflation expectations don't not anchor.

Absolutely totally possible that Central Bankers are just acting tough in order to pressure inflation down. Hopefully, that's the case, right? and I believe that's the case. that's why. and I want to be very clear so there's no confusion.

Uh, my like I'm I'm long this Market uh and I'm very happy about that because I do think that inflation will plummet. but I do think there's the potential for some minor, at least upside surprises in in the services sector. And so it makes sense to have a little bit of dry powder a little bit. you know, maybe 15 or something like that available for, uh, potential dip opportunities when we go back into red weeks.

Because there always will be red weeks again. And it's something to remember is when a rally starts. Is that? yes, enjoy the rally while it goes, But there will always be another red time in the future. so keep that in mind.

But again, my my longer term thesis is that, uh, whether you're all in now or your dollar cost averaging, just stay safe for the potential downside risk. Uh, that will probably end up being temporary as long as you can survive potential short-term drops. To the downside: I think we are on that. Nike Swoosh Recovery and things are going to be substantially more positive than they are going to be negative.

Now this is only true though if you're listening to folks that I think are are trying to have a balanced view of the market. Uh, there are unfortunately some folks that are real big bears who just refuse to believe that it is remotely possible that inflation could go away. Uh, and that for example, would be somebody like this dude on Twitter named macro Alph No, don't get me wrong, I'm not trying to bag on them. Uh, you know I Like his negative points of view because they serve as sort of like a contrarian reminder.

He's a big fan of saying the first Innings of a recession always look like a soft Landing that first the labor market weakens, but not enough to generate substantial job losses. And it's really only once you get job losses and earnings decline that and inflation drops that you realize oh my gosh, this recession is terrible. Uh, and then things get really bad. So in other words, you've got this individual saying look, things are going to get a whole lot worse before they get better and this sort of is reiterated by people like Michael Burry who say sell or other people who say look, as soon as the Federal Reserve pivots, things are actually going to collapse even more than uh, then then they already have I Personally disagree with that assessment very heavily.

The reason I disagree with that assessment very heavily is because the recession that we face today potentially maybe we don't right? Maybe we don't even go into recession. But the recession we face is one that is induced by the Fed. This is a manufactured recession. It's known as forcing a recession or or at least forcing the market close to a recession or close to recession.

This is what I talked about in January of 2022. I said that if inflation went hot, the FED will force a recession, especially if we get a wage price spiral. Now the good news is Jerome Powell believes the odds of a wage price spiral have actually been diminishing. This is very good because it means that maybe we don't have to get a forced recession.

And that is the key is the Fed does not actually have to continue engineering layoffs. The FED can and will u-turn on needing to continue to engineer layoffs in a forced recession. And that's what makes dare I say this time different from prior recessions is that in Prior recessions you had really structural issues. Uh, in markets.

Let's look for example, at the structural issues of the Great Recession dead people getting housing loans, rampant speculation. Uh for for Real Estate Uh, basically people with terrible credit scores getting these insane adjustable rate mortgages where they