The math behind cryptocurrencies.
Quantitative Easing & Cryptocurrency: Nuggets News presentation at GAIC 2019
Alex Saunders of Nuggets News shares his thoughts on what to expect from central banks on the road ahead from dropping rates, implementing quantitative easing and the applying modern monetary theory. Explaining why this is important to understand when investing in hedge assets like Gold and Bitcoin.
Alex Saunders is one of Australia’s leading blockchain educators and founder of Nuggets News.
Filmed at the Gold and Alternative Investments Conference 2019, Saturday, October 26, 2019.
Transcript
00:00how we’re going guys that’s working so00:01hands up who owns gold and hands up who00:06owns Bitcoin it’s bit more even than I00:09thought so yeah I’m definitely a big fan00:11of both and today I’m going to try and00:13give you a rundown of bitcoins history00:15and how it’s been affected by monetary00:17policy where I think that is going as we00:20head into the future and Bitcoin is very00:23hard to understand so I’m going to tie00:25together all these concepts as best I00:27can for you in under half an hour and00:29just a bit of an intro I run Nuggets00:32news I’ve been in cryptocurrency since00:342012 I was actually a pharmacist by00:37trade and I’ll talk about how my story00:40came about so these days where00:43Australia’s leading provider of free and00:45premium education with a focus on00:48Bitcoin other cryptocurrencies as well00:50as the importance of gold and protecting00:53your wealth a bit of well-rounded00:55financial education so Bitcoin often01:00gets called you know digital gold01:01internet money and I think these terms01:03maybe oversimplify it and don’t do it01:06justice so I’m going to talk about all01:07the different things that it is bringing01:09together and why it is so important so01:12another focus of my talk today is you01:13know what have we learned from the GFC01:15it’s ten years on now and Bitcoin01:18actually came about from the GFC my01:23journey begins around that time when I’d01:25been studying pharmacy but investing it01:27always been my passion and when the GFC01:30unfolded like a lot of you I’m sure you01:32want to know what happened and there’s01:33some fantastic documentaries out there01:35and you learn about how you know the01:37banks effectively caused all this01:39trouble and then got bailed out and01:41satoshi the creator of Bitcoin embedded01:44this message about the the bailouts for01:47the banks in the Genesis block of01:49Bitcoin so it’s very much one of the01:51messages that he was trying to portray01:53about bitcoins mission going forward so01:56since the the GFC I guess the message01:59from central banks and their02:01relationship with government has always02:02been around you know trust us02:04we’ve got these levers of printing money02:06and interest rates and we can steer the02:08economy and they really ramped up their02:11production of of money as most02:13in this room probably know to encourage02:15banks to lend out and get the economy02:17going that I’m gonna talk about how that02:19hasn’t really unfolded and what we saw02:21around this time was people becoming02:25aware of these issues and push back02:27against what was happening so Occupy02:29Wall Street was pretty prominent at the02:31time he kind of died down a little bit02:33but this was when Bitcoin was starting02:35to get a little bit of traction now like02:38a lot of people when you learn about02:39what he’s going on in the monetary02:40system you know I’m preaching to the02:42converted here at a gold conference and02:44I know personally I wanted to go out and02:45buy some some gold and silver and one of02:48the first bars I bought it wasn’t a02:50common I commonly made bar and I was02:52sort of thinking you know how I know02:53that this is legit so I guess that’s02:54probably one of the the aspects of02:57Bitcoin and auditing and even gold that02:59I believe blockchain can help Gold’s03:01case as well but I’m very much an03:02advocate of gold and silver and I still03:05own those today another thing that a lot03:08of gold bugs will tell you is the price03:10manipulation so depending on what degree03:12you believe in that I certainly I can03:14understand the case for you know these03:16futures markets and ETFs and03:18rehypothecation and what what is the03:20real gold underlying that and it’s03:23something that I hope doesn’t creep into03:24the Bitcoin world too much because we03:27don’t want that money that once exposure03:29to that asset being pushed into these03:31things that aren’t backed by real03:32Bitcoin or by real gold so you see a lot03:37of these different slides around03:39bitcoins properties and you know it’s03:42it’s all looking pretty good according03:43to that but I’m certainly not here to03:45tell you that Bitcoin is a replacement03:46for gold at all there’s some things that03:48it does are better and some things that03:50it doesn’t do better that track record03:52and the history of gold obviously is03:53very hard to compete with but it’s all03:55the properties of Bitcoin that give it’s03:58you know good credence to be a good04:00money the future money the next04:02evolution of money so for the first time04:06ever we had a way so I guess stick it to04:09central banks and governments and say04:10well you know if you’re going to try and04:12manipulate gold and ETFs and I know most04:15people instrument robably fans of04:16holding the real thing for the first04:17time ever we’ve got a way to hold your04:21assets outside the system and become04:22your own bank and this was a famous04:24photo that you probably saw with someone04:26to buy Bitcoin behind janet yellen air04:29so what is Bitcoin what are the04:32properties that make it a good money04:34well the first things you learn is about04:36this finite supplier and how the04:38inflation rate halves every four years04:40so you can see there on the curve we’re04:43at a very important point well in May04:45next year we step down from 4% inflation04:47to 2% and then again four years later04:50down to 1% and at that time Bitcoin04:53becomes more scarce than that inflation04:55that all central banks are targeting of04:57two and three percent the new production04:59of gold is about one or two percent so05:01Bitcoin will become you know more scarce05:03in terms of the new coins created and05:05that’s very attractive in a world where05:07money printing is running right another05:10thing that you’ll love about Bitcoin05:12once you learn about is this05:13decentralized nature so what does that05:15mean well anyone can download the05:17Bitcoin blockchain running on their05:19computer help support the network you05:21can download a wallet and you become05:23part of the network you can send Bitcoin05:25to anyone else there’s no one company05:27that can be targeted or shut down05:29there’s there’s nodes computers all over05:31the world that run this network and it’s05:33literally impossible to stop unless you05:35plan on showing down the entire Internet05:38so around 2013 we saw the Cypress05:42bailing so heads up who knows the story05:44there so this is the first time that05:47we’d seen governments and banks say well05:49we’re not we’re not going to bail the05:50banks out and give them money you’re05:51gonna have to bail your customers in to05:53shore up your reserves and they got what05:56they call a haircut where the customers05:57lost a percentage of all money in their05:59accounts and we saw a lot of protests at06:01the time the ATMs shut the bank shut in06:04Cyprus and Bitcoin ran from a hundred06:06dollars to over a thousand dollars as06:08people in Cyprus saw that as the best06:10way to protect their wealth and have06:12access to their money so this was the06:14first I guess bubble and Bitcoin does06:16follow these these cycles these mini06:18bubbles where we have a very scarce06:20asset it’s thinly traded so when06:22everyone tries to borrow we get these06:23big run ups in price and that leads to06:25euphoria and speculation and then we06:27have these these crashes and like06:29anything it overshoots to the downside06:31and we have panic so I’ve been through06:32seven of these cycles now since 2012 and06:35you know every time people who say whoo06:38bitcoins dead he’d ends up going up a06:39thousand06:40sent the following year throughout this06:43time and despite this volatility if you06:45look at all the network stats for06:46Bitcoin and we can pull a lot of data06:48from that because the blockchain is06:50transparent and anyone can see what’s06:51going on the growth in the network was06:54very constant so bitcoins price06:56unfortunately isn’t just going to06:58steadily increase and you know REITs07:01these large market caps in the trillions07:03where I believe it’s going we’re going07:04to have those cycles despite the actual07:07growth underlying it being very very07:09consistent so most of you’ve probably07:12seen this slide about the u.s. debt07:14clock it’s probably going up a few07:15billion since I took this screenshot07:17yesterday and it’s these are the reasons07:20why bitcoin is so important because of07:23that finite nature that low inflation07:25rate that I spoke about there’s also an07:27Australian debt clock if you want to07:29google that and you can see how quickly07:31these liabilities and promises the07:34government is saying they’re gonna pay07:35us all are unfolding so I’ll put my07:38pharmacists hat back on07:40and once data like to tell people is07:41that for the first time in history07:42there’s more adult diapers than baby07:44diapers we’ve got a generation of baby07:47boomers every day 10,000 baby boomers07:49retire in the US and they’ve been07:51promised these pensions and this07:52Medicare and as you saw in the previous07:54slide that’s hundreds of trillions of07:56dollars the US and other countries are07:58promising at a time when they’re running08:00huge deficits there’s no way that this08:02can be funded and every dollar of debt08:04represents something that needs to be08:06paid out in the future so we know that08:08the money supply is going to have to08:09increase into the hundreds of trillions08:10of dollars and that is going to be very08:13inflationary in all countries around the08:15world at the same time we’ve got a08:18generation of young people such as08:20myself that have grown up with the08:21internet and devices and every time a08:23new technology comes along the adoption08:26rate speeds up so smart phones and08:28Facebook took over the world you know in08:30a number of years only a couple of years08:32compared to previous technologies and08:34communication things spread like08:36wildfire these days and when I see those08:39charts of the Bitcoin and people saying08:40it’s dead it’s a bubble all of those08:42little bumps on the road when you zoom08:44out just another adoption curve in my08:46mind and we’re gonna head to a 80 or 9008:48percent penetration and that doesn’t08:50mean the Bitcoin becomes a world08:51currency or anything like that it just08:53means that08:54every person he’s going to use it to08:55some degree whether it’s just on08:56holidays you know to some degree I08:59believe Bitcoin is going to be used by09:00lots of different people in different09:02capacities now when people tell me that09:05no one spends Bitcoin no one uses it a09:07little company in Australia called09:08living room with Satoshi you have09:10allowed you to pay any bill in Australia09:12since 2014 pay your credit card off pay09:15someone else to their bank account pay09:17your dentist over be pay you can pay any09:19bill in Australia for five years so09:20people are using this every day and we09:23have more and more merchants that are09:25accepting Bitcoin directly so there’s09:27websites and and cards where I can use09:29to pay for things with my Bitcoin do my09:31shopping every week but now we go a step09:33further where the merchants and cafes we09:36rolled out Brisbane Airport last year09:37every shop there now accepts Bitcoin so09:39the merchants are now accepting it09:41directly as well as those other09:42intermediary services now some people09:45say that Bitcoin isn’t the best method09:47of payment it can get a bit expensive in09:48the networks a bit slow and that’s why09:50we’re working on things like the09:51Lightning Network as you see here so09:53that’s a layer that sits on top of the09:55Bitcoin network it’s not perfect like09:57the internet in the early days we’re09:59ironing out all the bugs and we’re10:00making this thing work better and better10:01over time but as long as you can find a10:04route to another person just like we10:06used with the internet you know it finds10:08a route to that website you want to use10:09you don’t even have to know what’s going10:11on your computer on the back end this is10:12what’s happening in the world of Bitcoin10:14and payments now those cycles that I10:17spoke about this chart huge is just10:19showing you the market cap of Bitcoin as10:20it as it grows compared to the realized10:22market cap so what that means is we can10:25look at the last time a Bitcoin moved10:26you know in a wallet when someone bought10:28it and if they bought it a hundred10:30dollars and then the price runs up to10:31$1,000 we can see that the actual market10:34cap is now a long way away from what10:36they last realized the price of their10:37Bitcoin app so people take profits when10:40that moves too far away and it reverts10:42back to the mean and we bottomed out10:44again last year in 2019 at around three10:46thousand dollars and the little orange10:48line you can see at the top there is is10:50that realize market cap so it basically10:52means where everyone’s had a chance to10:54sell now if they want to take profits10:55and whatnot and so the actual true value10:57that’s been realized at the Bitcoin10:59network is at all-time highs and11:00consistently increasing now people say11:03Bitcoin it’s not a good story value it’s11:05too volatile well it11:07we’re in a bear market we’ve been in a11:08bear market for almost two years and11:10it’s still been profitable for 9011:11percent of bitcoins life to buy Bitcoin11:13you’re still in profit and I believe11:15we’re gonna pass those all-time highs in11:17the next 12 or 24 months and that will11:19go back to a hundred percent of the time11:21becomes been a good store of value now a11:23lot of people to the Gold’s of a good11:25story value if you bought it over $1,90011:27and then it falls to a thousand well you11:29bought silver at fifteen and falls to11:30fifteen dollars but those same arguments11:32we can use for Bitcoin zoom-out look at11:34the longer-term chart over time it’s11:36consistently been a better story value11:38than every currency on the planet so11:41what happens when you’ve got an asset11:42that’s the best performing asset and11:43then planet every year buy one for ten11:45years or there’s a lot of copycats come11:47out and other coins so one of the11:49arguments often hears about Bitcoin11:50Forks someone can copy the network hands11:53up who’s heard of Bitcoin cash it’s a11:55it’s a fork of the Bitcoin network so a11:58community can say well we think Bitcoin12:00will be better if we have this feature12:01and they can split away and it’s up to12:03you then to convince everyone why your12:05coin is better so there’s over a hundred12:07Forks 99.9% of them are crap they have12:10zero value but it’s allowed people to12:13try and experiment with something12:14different now they pretty much extends12:16for all cryptocurrencies there’s over12:18ten thousand out there today the term12:20cryptocurrency probably doesn’t do it12:21justice because most of them aren’t12:23trying to be currencies these days12:24there’s just a lot of projects and12:26businesses in the real world that are12:28using a blockchain technology so we need12:30to start referring to these things as12:31digital assets they’re not trying to be12:33currencies and I think that confuses a12:35lot of people so Bitcoin cash has been12:37the most successful hard fork and that’s12:39only captured around two or three12:40percent of the network so Bitcoin12:42continues to get stronger and stronger12:44we call it anti fragile throw out any12:46attack he won on it or any copycat coin12:48and it continues to gain market share12:50and any feature that actually works12:52really well Bitcoin can update and12:55absorb that feature so now we see12:59everyone wanting to get into this space13:00the payment space banks have had it13:02pretty good for a fair while now so13:04Apple pay launch email card13:05recently Facebook came out with the13:07Libra cryptocurrency13:09now all these coming up with payment13:12coins stable coins JPMorgan have13:15launched their own coin so it’s very13:16different to what Bitcoin are trying to13:18do it’s not finite they can13:20as many of those stable coins as they13:22want and that’s just absorbing value and13:25it’s pegged to fiat currency that has13:27all the issues that I’ve been talking13:28about it’s no good being pegged to13:29something that’s going to be inflated13:31away over time and we’ve already seen13:33big regulatory pushback MasterCard Visa13:36PayPal they’ve all pulled out of this13:38labor project and Mark Zuckerberg was in13:40front of Congress getting and grilling13:42again yesterday one of the things that13:44actually said in that Congress hearing13:46was we can’t call the CEO of Bitcoin in13:49here they’re actually admitting that13:51there’s nothing they can really do about13:52it because it is truly decentralized so13:55for ten years now you know the big banks13:57have seen these huge profits the execs13:59get these huge bonuses and yet here we14:01are at the moment last night the Fed14:03prints another hundred billion dollars14:05and lend it out to banks because they14:06they’re crying poor we haven’t got14:08enough money to show up our books that14:09have been paying themselves these14:10enormous bonuses no one’s gone to jail14:13nothing’s been fixed since the GFC and14:15this is at a time when asset prices are14:18at record highs so the sp500 property14:21prices bonds you name it this has been14:23one of the periods of you know enormous14:27growth and your banks are still crying14:28for you know help us out print us some14:31more money now now people aren’t buying14:34this anymore14:34and it’s very very clear even the14:36Federal Reserve in their notes are14:38admitting that what they did didn’t work14:40it ended up with asset inflation and14:42it’s caused inequality so the top one14:44percent you know they’ve gained enormous14:46wealth the bottom 90% you know we see14:48this in Australia as well there’s no14:49wage growth it’s just getting harder and14:51harder for that average person to afford14:53to live and they report inflation at two14:55or three percent but if you look at a14:57lot of the work that’s been done by you14:58know alternate economist it’s far closer15:01to 7 or 9 percent when you see your pack15:03of the Tim Tams getting smaller15:04your bottle of coke getting smaller and15:06the price stays the same there’s ways15:08that they hide inflation from us so as I15:12said this period should be very15:13prosperous for banks they’ve got it very15:15good they get to create that money and15:17you know they should be really booming15:19but yet we see Deutsche Bank in these15:21European banks are on their knees we saw15:23a study come out this week that half the15:25world’s banks wouldn’t survive a15:26downturn now with markets at record15:29highs and we know that this is one of15:31the longest periods of expansion in15:33history15:34every day a recession is drawing near15:36it’s just a natural part of the business15:37cycle so they’re admitting that when15:39that hits half our banks aren’t going to15:41survive so at the moment they’re giving15:42them a hundred billion dollars a day I15:44very much think that the new QE15:46quantitative easing is going to be to15:47the tune of trillions of dollars to have15:50to say the bank’s now because they don’t15:52have those reserves and they’re so weak15:54we’re hoping to see them take measures15:56to force people to keep their money in15:57them and in the legislation we’re seeing15:59Balian laws being written in in16:01countries like Australia just like we16:03saw in Cyprus so this week ANZ16:05updated their terms where they can16:06freeze your account they can stop you16:08getting money out and they can close16:10your account altogether if it would mean16:11that they would suffer financial loss16:13we’re also seeing the the cash war in16:17Australia at the moment they’re trying16:18to ban those $10,000 payments they’re16:20already talking about dropping that to16:21five or two thousand dollars and where16:23this is all heading is negative interest16:25rates in all these countries around the16:26world that abandon cash the IMF wrote a16:28paper that said look negative interest16:31rates don’t work if cash exists because16:33people can pull money out and if we we16:34want to enforce negative interest rates16:36we need to keep people in banks so we16:37need to ban cash so whether it’s you16:40know banks or the well bond market this16:42is a virus that’s spreading and I think16:44people are asleep at the wheel because16:46we’ve had it pretty good in Australia16:47and and in the US but as soon as those16:50rates go negative in our country and in16:52the US it’s a big big wake-up call to16:54everyone that what what is going on16:57interest rates for the past 20-30 years16:58have been trending down people thought17:00they couldn’t go past zero and yet17:02they’re you know negative one percent or17:03greater in some of these countries now17:05that should be traditionally seen as17:07strong in Europe so the amount of17:09negative yielding debt in the world it17:11recently passed seventeen trillion17:12dollars you know how how easy is it to17:15park some money in gold or Bitcoin or17:17something that doesn’t have a negative17:19yield people are rushing into negativeyielding bonds because they think thatcentral banks are going to print moneyout of thin air and buy those bonds offthem so everyone’s on the one side of17:28the boat and that what worries me with17:29this this bond bubble now at the same17:32time everyone’s playing happy faces here17:34where there’s never been greater17:36mistrust of banks and policymakers so17:39Commissioner Haynes said that trust has17:41been lost to all the corporations and17:43institutions and banks in Australia and17:45I very much agree17:48now for the first time ever we’re seeing17:49widespread civil unrest people say oh17:52you know it’s it’s just Argentina or17:54then it’s just Venezuela then it’s just17:56symbolic17:57this week it’s Chile Hong Kong you know17:59it’s coming to a city near you where18:01people and governments are saying well18:03what we gonna do here let’s just raise18:05taxes and people are saying no we’re not18:07going to stand for that anymore and and18:09everywhere Bitcoin is becoming part of18:11this social movement now at the same18:13time we’re seeing central bankers MarkCarney from the Bank of Englandliterally saying that you know it isn’tfair that the US dollar has this worldreserve currency they get way too muchan advantage here so this isn’t Russia18:25and China throwing this anymore this is18:26their best friend saying that you’ve had18:28it too good for too long now the u.s.18:30being a world reserve currency means18:32that all these other regional currencies18:34have their debt denominated in u.s.18:35dollars and as their currencies fall and18:37u.s. dollar gets stronger they owe more18:39and more money back in terms of their18:41local currency so when seeing the US18:43dollar strengthened at a time when he’s18:45really hurting everyone else and so18:47there’s questions around how long it can18:49remain the reserve currency and make18:51mark carney they’re calling for a newreserve currency a digital currency toreplace the dollar we’re also seeingcalls for the u.s. we know that chinaare launching their own cryptocurrency19:02we’ve seen venezuela launch theirs so19:05whether or not the US does it you know I19:07don’t really care it’s gonna be a case19:09of you know trust us again this is a new19:11currency the only difference is they’re19:13going to be able to monitor literally19:14everything you do on a blockchain versus19:17what they do already with the banks and19:18they’re going to print those hundreds of19:20trillions of dollars of digital US19:22dollars it’s nothing like Bitcoin that19:24has a set amount and Bitcoin just19:26becomes more and more scarce relative to19:29all these other currencies that banks19:31and governments and the Facebook’s of19:33the world want to create so at this time19:36when all our currencies are going19:38digital everyone uses their online19:39banking less people use cash everyone19:42does the pay past these days so money is19:44already digital but people still think19:46about it as as notes or people don’t19:48realize it’s not backbite by gold19:50anymore so we’re seeing penetrations of19:53smart phones you know 90 percent or19:55greater even in emerging markets even if19:57they don’t have a smartphone they’ve got19:59a basic phone these days and you don’t20:00need a good20:01their connection to the Bitcoin payments20:02you need a very basic mobile connection20:04is all you all you need to be able to20:06participate in this network and become20:08your own bank20:09so throughout these Asian countries you20:11know Hong Kong was another recent20:12example where they’ve had issues with20:14the ATMs and whatnot these people are20:16extremely familiar with digital payments20:18and scanning and shops with their QR20:20codes and Bitcoin is just the next step20:22in that evolution of money so the20:25greatest opportunity in lies in these20:27emerging market economies where there’s20:29billions of people so too often people20:31say are the government will never let20:32Bitcoin overtake you know things in20:34Australia or the u.s. it doesn’t matter20:36Bitcoin has already been used widely in20:38Venezuela and all these other countries20:39where there’s billions more people than20:42in Australia the u.s. all these these20:44Western countries that are unbanked so20:46just like they didn’t get phone lines20:47and they started using mobile phones20:49they’re not going to get banks they’re20:51just going to start using digital20:52currencies on their phones so the value20:55of the Bitcoin network comes from the20:57number of connections and that’s why we20:58see just like Facebook grow that any21:00good technology it grows exponentially21:02and the value comes from the number of21:04connections in the network that’s known21:06as Metcalfe’s law so as more and more21:08people use Bitcoin it means more people21:10can send it to each other you know my21:12business that I started we’ve got a21:13number of services from say nine dollars21:16a month to $50 a month our customers are21:18all over the globe how someone in Russia21:20meant to send me nine dollars a month21:21for my newsletter it’s not possible21:23without Bitcoin and digital currency so21:25my business and hundreds of others are21:27examples of what’s possible we’ve crypto21:29currencies without the banking system so21:33this is a screenshot of a blockchain21:35Explorer so just like you can search21:37something in Google with on the Bitcoin21:39blockchain you can search for21:40transactions now this is a good and bad21:42thing if you know anyone’s address you21:44can send anyone else on the network21:46money there’s no no I can sense of that21:48transaction or freeze your account and21:49in terms of crime just last week this21:53helped regulators catch the bad guys21:55this is their best friend they could21:57follow the bitcoins where they’ve paid21:58them to when they cash them out and they22:01catch these crooks so to say that22:02bitcoins bad because you get to use for22:04crime you know that it’s just simply not22:06true it’s a regulators best friend now22:09one of the big debates we are going to22:11have is once Bitcoin starts to implement22:13more privacy so it’s important for be22:15this is not to be able to see every22:16transaction that they do so whether the22:18privacy upgrades come on the main22:20Bitcoin chain or second layers that’s22:23going to be a big debate as we move22:24forward about giving Bitcoin more22:26privacy at the same time we’re going to22:29get rid of those long strings of letters22:30and numbers that you just saw that are22:32confusing you’re going to be able to22:33send your cryptocurrency to Nuggets news22:36Bitcoin or Alex Saunders crypto so human22:39readable names and addresses just like22:41you do in your phonebook click of a22:42button send money to anyone in the world22:44another argument often hear is that22:46bitcoins wasteful bitcoin uses you know22:49more energy than a small country these22:51days but what they won’t tell you in the22:52mainstream is that the vast majority of22:54that is spare capacity at reactors that22:57would already be gone waste or renewable22:59energy so pick coin is the fastest23:01growing renewable energy industry on the23:03planet people are actually going out and23:05and building renewable energy plants23:07because they can start to mine Bitcoin23:09and pay it off you know this is uses23:11expanding our renewable footprint at a23:13time when governments are being slow to23:15act now part of bitcoins one of the23:19features that keeps it so secure it’s23:21the most secure computer network on23:23earth so when you hear about hacks there23:25are people that left their password in23:27there in their email account well they23:28left their you know being logged in at23:30work Bitcoin network has never been23:32hacked because it is so secure all these23:34computers all 10,000 that I showed you23:36at the start on that world map they’re23:38all securing the network so unless you23:40can hack every one of those at once you23:42can’t hack the Bitcoin blockchain so23:44this feature of how much energy it uses23:46secures it if governments tried to23:48attack it with every supercomputer and23:50on earth it wouldn’t even put a dent in23:53Bitcoin there’s so many more computers23:54globally that are securing the network23:57all that money that has been invested by23:59those miners to buy those computers that24:02is all very important in terms of the24:04infrastructure of the Bitcoin network so24:06if I said to you I was here yesterday24:08for the panel discussion I think24:11yesterday I said what would it be worth24:12if Microsoft or Apple came out and said24:15hey guys we build a network that can’t24:17be hacked it’s got no down time that24:19would be worth hundreds of billions of24:21dollars so that is what the Bitcoin24:22network is it’s not just this payment24:24system or this store of value it’s the24:26most secure computer network in the24:28world and that24:29while we see someone like Microsoft say24:31geez this is better than anything we’ve24:32got let’s just our building our products24:34on top of the Bitcoin blockchain so24:37these household names like Microsoft24:38Vanek or one of the biggest providers in24:40the world of investment ETFs these are24:43the household names now that people are24:45realizing that oh this isn’t about this24:47isn’t a bubble they’re telling their24:48clients the investment case for Bitcoin24:50now a lot of people are tech savvy they24:53can’t figure out the hardware wallets24:55which is like a little USB stick where24:57you store your bitcoins yourself and has24:58your password on the device so it can’t25:00be hacked but not everyone wants to do25:02that you know we’ve done education25:04around all that sort of stuff if you’re25:05interested but some people they don’t25:06want to hold their own shares they just25:08want someone else to do it for him so25:09we’ve seen reputable companies like25:11Lloyds of London and bit go they’re25:14offering insurance and custody and25:16that’s why we’ve seen influx of high net25:18worth clients over the past 12 months25:20and in Australia our biggest growing25:22demographic is baby boomers so we did25:24one on one education we have a premium25:27community we’re but the number of over25:2965 now and they they’ve been through25:31cycles and crashes they see the25:33importance of gold and they’re starting25:34to understand the importance of Bitcoin25:37at the same time we’ve seen the futures25:39market take off as I said for I’m not a25:41big fan of that maybe it makes me quite25:43a bit more legitimate but I don’t like25:44those type of assets that are backed by25:46real Bitcoin but we’ve seen things like25:48option markets and even decentralized25:50option markets so it’s not one company25:52now anyone can create a market and a25:55theorem it’s the world’s second largest25:57cryptocurrency I’m also very bullish on25:59because the world of decentralized26:01finance is just exploding so instead of26:03paying $20 to calm sector trade shares26:05you’re gonna pay one cent and you’re26:07gonna buy them off someone else that’s a26:08shareholder and what blockchain does is26:10cut out the middleman of all these26:12services that are you know rent-seeking26:14and just taking their little clip each26:15time and it makes everything26:17peer-to-peer so tying this all together26:21we’ve seen the Federal Reserve start to26:23create billions of dollars each night to26:25help these banks and the old trustus you26:27know everything will be fine we’re gonna26:28normalize everything I think that’s why26:30we’ve seen gold correct over the past26:32few years as people thought oh it’s all26:34gonna go back to normal 3% growth 5% in26:36a bonding my retirement account26:38I don’t need gold or Bitcoin and now26:40that story is not being bought anymore26:41it’s qe426:43you know they can’t stop printing this26:44money in the debt based system that 20026:47trillion dollar figure that I’ve spoken26:48about we have to continue to grow and26:50create debt if we’re going to pay all26:52these people so once again we’re seeing26:54a lot of tension whether it’s between26:56you know the US Fed who don’t want to26:58drop rates and Donald Trump saying let’s26:59get rates to zero or negative everything27:01will be growing even more for the first27:03time throughout history we’re seeing27:04real tension between governments and27:06central banks who are saying trust us27:09we’ll fix everything without two levers27:11and now they’re saying I think we’re out27:13of tools here government it’s up to you27:15you need to spend more we’ve done all we27:16can do pass the buck27:17so who’s going to be left holding the27:19back here we know governments are no27:21good at running those economies and it’s27:22up to them to try an ear trick or the27:24central bankers to try something even27:26more crazy and I think actually people’s27:28QE where they enough to hand out money27:30to people because it’s not going to be27:32politically acceptable to put money and27:33give it to the banks and then we run a27:35danger of inflation but people aren’t27:37going to let it fly printing money and27:38giving it to the banks so you guys know27:40the story every fiat currency throughout27:42history has been eroded away over time27:44this is just last year in terms of27:46inflation in in ten countries there for27:48example and with more and more people27:50that Tim Draper’s of the world27:51respectable investors Jack Dorsey the27:54founder of Twitter saying that there’s27:56you know we’re in this Internet age just27:58like the internet opened up the way we27:59transfer information across the world28:01everyone said oh you can’t do that the28:03bad guys were taught for each other28:04Bitcoin allows anyone to transfer value28:06to each other and then a theorem again28:08further expands what we can do28:10peer-to-peer so there’s going to be some28:13sort of world currency on the internet28:15and Bitcoin has the track record so the28:17biggest opportunity that I see is these28:20currencies there’s over 200 currencies28:22globally the top five that are the world28:24reserve currencies of the world sure28:26that they’re fairly strong and whether28:28the US you know you loses its purchasing28:30power with all that debt that’s another28:32story but who on earth is going to hold28:34these hundred Southeast Asian currencies28:36and when the government’s are saying28:38trust us with the currency wars heating28:40up it’s a race to debase their28:41currencies as economies weakened they28:43all try to get the value of their dollar28:45down to help their exports it’s28:46literally a race to the bottom and we’ve28:48seen Donald Trump tweet about this28:49so these currencies have all got market28:51caps in the hundreds of billions or28:53trillions of dollars with that little28:54blip down the bottom there called28:56Bitcoin when28:57in a country with a smartphone can28:58choose to park their wealth in something29:00that’s fixed and scarce29:01or Park their wealth in this this29:03currency that they’ve seen Harper29:04inflate away constantly throughout29:06history I think the choice is pretty29:07clear so we’re seeing this in Argentine29:10record volumes Chile you know the list29:13is very long the number of people that29:15are now choosing Bitcoin instead of29:16something else29:17so the having next May is very important29:19as I spoke about and then again four29:21years later and where to Bitcoin derives29:24its a lot of its value from similar to29:25gold on this chart which you see the29:27yellow block up the top right corner is29:29the scarcity of gold that is something29:31that makes it valuable29:32now if gold goes to $5,000 an ounce29:35maybe people are going to mine it maybe29:36the inflation of gold goes to three or29:38four percent silver we see there as well29:40gets a lot of its value because of its29:42scarcity but Bitcoin as we see it29:45trending up that chart over time as it29:47becomes more and more scarce it29:49increases in value and bitcoin is going29:52to surpass gold in terms of what we call29:53stock to flow the amount of new supply29:55coming into circulation compared to29:57what’s already exists and I think the29:59bitcoins going to surpass the market cap30:01of gold within five years so tying it30:04all together when you look at everything30:06else told you today it’s a payment30:07system the smartest minds in the world30:10are working on the cutting edges of30:11technology it’s a store of value it’s a30:14medium of exchange it’s the world’s most30:15secure computing network what’s all that30:17worth in a world where we’ve got a30:19hundred billion dollar market cap30:20compared to the hundreds of trillions of30:23dollars that exists in currency markets30:24stock markets these technology companies30:28I think it’s an absolute no-brainer to30:30park a little bit of your wealth in30:32Bitcoin and if you want any more30:33information on anything we do come and30:35see me or head to Nuggets news.com30:37today.you thank you30:39[Applause]30:45[Music]
The Key to Bitcoin’s Future: Inflation
If the cryptocurrency is going to be used as widely as dollars, its fans must abandon the dream of deflationary digital gold.
Bitcoin is back, sort of. The original cryptocurrency hasn’t regained the lofty highs of its bubble peak in late 2017, but it has climbed back up to about $10,000:
Predictions that Bitcoin would collapse have not borne fruit. Despite its bubbles and crashes, the cryptocurrency is now a semi-permanent feature of the global financial landscape.
What it is not, however, is a generally accepted currency. Although many retailers now accept Bitcoin, the overwhelming majority of day-to-day payments are done in regular old fiat currency. The mere fact that the dollar price of Bitcoin remains an important metric indicates that Bitcoin’s central value is as a speculative asset, rather than its usefulness as a medium of exchange.
It’s fairly obvious why. Because of Bitcoin’s price volatility, people don’t want to hang onto it for very long. No one wants to get their paycheck only to find that it has halved in value by the time it comes to buy groceries. Also, optimists who think Bitcoin’s value will continue to go up on average over time will be reluctant to part with it in exchange for something ephemeral like a pizza; better to hang onto the BTC and buy pizza with depreciating dollars instead. (Disclosure: I still own a small amount of Bitcoin.)
In fact, these two reasons are just different sides of the same coin: Basic finance theory says that in a reasonably efficient market, high expected returns come at the expense of high volatility. An asset like Bitcoin, or the U.S. dollar, can be a good investment or can be good for buying stuff, but unless the economy is deeply dysfunctional, it can’t be both.
Some economists, however, are thinking about how this situation might change, and whether Bitcoin — or some alternative cryptocurrency — might actually replace fiat money as the standard means of payment. This has big policy implications, because if it did become real money, cryptocurrency could interfere with central banks’ ability to manage the economy and the price level. It also matters for crypto investors’ wallets.
One possibility is that nothing needs to be done, and eventually Bitcoin will settle into a new low-volatility equilibrium, making it more suitable as a means of payment. Economists Michael Choi and Guillaume Rocheteau have made a model in which this happens. The problem is that the model sees Bitcoin competing with other commodity-like forms of money, such as gold or other cryptocurrencies. Their result relies on the idea that liquid assets will always be in short supply. In reality, Bitcoin is competing against fiat currencies that can be produced more or less costlessly.
A more plausible prediction comes from economists Jonathan Chiu and Thorsten Koeppl. Like other economists who have theorized about Bitcoin, they view cryptocurrency’s fundamental challenge as that of preventing double-spending — in other words, verifying electronically that someone really has the money when they make a payment. This issue of digital trust, after all, is the problem Bitcoin was designed to solve.
Chiu and Koeppl suggest that to become useful as a form of money, a cryptocurrency should be inflationary. The people who verify Bitcoin transactions, called miners, are now compensated for their usage of computing power by being awarded new Bitcoins, but the rewards are decreasing over time. One of the basic ideas of Bitcoin, which stems partly from the hard-money beliefs of its creators, is that the cryptocurrency should be deflationary — that its supply should be limited, and its value should increase over time due to increasing scarcity. This means that eventually, miners will have to be rewarded with transaction fees instead of new Bitcoins.
Chiu and Koeppl say this is a bad idea. Transaction fees, they note, are levied on a small population — that is, whoever is doing the transaction. To make it worth the miners’ while, the fees must be very high, which discourages people from transacting in Bitcoin. If miners are instead paid with inflation, the cost gets spread out among everyone who owns Bitcoin. Also, transaction fees make a double-spending attack more potentially lucrative, because creating a fake transaction would also save money on the fee. Thus, they recommend sticking with the inflation method of payment, and letting cryptocurrency depreciate over time like the U.S. dollar does.
This could be exactly what cryptocurrency needs in order to turn into real money. Negative expected returns — essentially, a low and stable inflation target — would make Bitcoin less attractive as a long-term investment. Instead of hoarding it, people would be fine getting rid of it in exchange for pizza. The currency’s value might then stabilize, as speculation decreased.
Abandoning the dream of deflationary digital gold might be hard for Bitcoin’s adherents to accept. But other cryptocurrencies, such as ZCash, Monero, Dash or Facebook Inc.’s Libra might step in to fill the gap. Of course, they would still have to overcome the technical problem of being able to handle large transaction volumes as cheaply and easily as a credit card company, but Chiu and Koeppl are confident that this is possible.
So ironically, cryptocurrency might only become a currency if it acts more like the U.S. dollar, with a low but predictable inflation target.
The Risk That Interest Rates Stay Low.. And We Can’t Afford an Increase (Crisis)
Transcript
00:01MIKE GREEN: Mike Green, I’m here for Real Vision at the Real Vision Studios in New York00:05City.00:06Today, we’re going to sit down with another individual who is known for his work in the00:10past of space, in particular, his work on ETFs.00:13Steven Bregman has a been on Real Vision before with an extended series called, “The Dark00:18Side of ETFs,” where he sat down with Grant several years ago.00:21We’re going to revisit that, particularly in the context of some of the stuff I’ve talked00:24about.00:25I’m really interested in how Steven thinks about the endgame of the passive strategies00:29and how to think about the influence in the market.00:32Let’s sit down and see how this goes.00:34Steven, you and I have not had the chance to talk for a couple of years, you’ve been00:40one of the other voices in the wilderness shouting about the risks associated with passive00:44investing.00:45I’d love to pick into your brain and understand the approach that you’re taking to some of00:50these challenges and some of the opportunities that are created by the growth of passive00:55investing.00:56One of the places to start is one of the areas of difference.00:59I focused primarily around the indexing component and you’ve spent a lot of time talking about01:03ETFs.01:04STEVEN BREGMAN: Well, essentially, they’re one of the same.01:07Sometimes people use the terms interchangeably because they don’t know the difference, and01:12they’re being casual about it, and I do the same actually, ideal primarily with direct01:18individual clients.01:19They’re not institutions.01:20They don’t have an institutional mindset.01:25They’re unaware of real differences.01:29They’re unaware of the fact that asset management companies, Wall Street is not really about01:36investing.01:37It’s about asset gathering.01:39They would be unaware, for instance, that how does an index come to be.01:44An index comes to be because a certain asset management specialize in this might be under01:53pressure from ever declining fees and you can’t charge a premium fee for a commodity02:00product.02:01Once upon a time, I think the fees on S&P; 500 index are like 50 basis points 60 basis02:07points, now, they’re down to zero.02:11What do you need to do to justify a higher fee?02:15Create something that seems to have, at least has the fig leaf of differentiation.02:20You can charge more for that, at least for a while.02:24You invent a new index, you do some back testing, you find some bucket of 20 or 30 or 40 companies02:32that fit some theme that back test well for the last five years.02:36By definition in this industry in modern portfolio theory, as applied nowadays, that means, some02:44positive rate of return with some relatively low comparative volatility, beta correlation,02:53what have you, and then you can float a new index, and they’re from offering ETF against03:03it.03:04You can’t even get it off the ground unless it back test well.03:08That’s how that works.03:09Indexes don’t just come about because they’re good investments, they come about because03:13it’s an opportunity for a management company to gather assets through a new ETF for which03:19at least initially, they can charge 45 or 55 or 65 basis points.03:23They can keep that fee, except if they’re lucky enough to gather enough assets, not03:2810 or 20, 30, or 40, 50 million, not even enough to break even, but if I gather some03:35hundreds of millions of dollars, well, then somebody else would come and knock them off,03:39like Vanguard and drag the fees down again.03:41People don’t even get these basic concepts and because my natural audience are individuals,03:46who really are the victims of this asset gathering business that parades as an investment business,03:56we study that.03:57MIKE GREEN: Well, you and I originally started in the same space.04:01You come up from the classic stock picker, single stock focus, run a highly concentrated04:06portfolio and by some measures, you found a few names that you think are truly extraordinary.04:11We can talk about a few of them if you’d like, but your insight into ETFs that I know you04:18from the Grants Conference discussions is largely around the dynamic of many different04:25ETFs buying the same underlying products, and this tendency to overlap.04:30You’ll see very high representation of Exxon Mobil, you’ll see very high reputation representation04:35of other stuff.04:36The dynamic that you’re talking about now, where effectively you offer a good back test04:41to try to offer something that you can actually charge fees for and the potential for if that04:48gets to scale, either you to lower your costs so that new entrants can’t come in and replicate04:52it or to be disintermediated by one of the giants in the industry.04:56STEVEN BREGMAN: They’re very disinclined to do that, they need every penny.05:00MIKE GREEN: Yeah.05:02How do you think about this dynamic of the difference between a Vanguard model and a05:08BlackRock type model where they are charging rock bottom fees and the need within the industry05:15for innovation in order to push forward how thought process is going?05:19STEVEN BREGMAN: The whole thing doesn’t even make a difference.05:22There’s no differentiation.05:24The whole thing, I’m going to say something, it sounds incendiary, I don’t mean to be incendiary,05:28but well, I shouldn’t say it’s a lie, but it’s false.05:33The whole thing is a false premise.05:34Now, we actually have the evidence.05:37The evidence is in.05:40We now have a couple things I’ll mention.05:43First of all, the great indexation passive investing ETF experiment, which took off for05:50real, more or less yearend 1999.05:53Slowly at first, but it was given a real boost in the wake of the 2007-2008 financial crisis06:00and people got really scared.06:02Now, they did everything that people do, which is act reflexively, which is not necessarily06:07helpful, which is first of all, sell your securities and memorialize a perhaps temporary06:14loss.06:15Then when they get back in after there’s confirmation that things are going up, which means they’ve06:19lost much of the recovery.06:23That’s normal.06:26What they did is they defaulted immediately to ETFs.06:29They were there.06:31They had time to become better known.06:35They’re a better mousetrap than a mutual fund and people had been really traumatized.06:43Traumatized, by the way, not just individual investors, but their brokers, financial advisors,06:49trustees of pension funds, [indiscernible] they all work.06:53They were scared of risk, all kinds of risk; manager risk, security specific risk, everything.07:02The proposition of an index made a lot of sense.07:06People had the experience, I could buy my favorite REIT.07:10Maybe that’s the one that goes to zero or I could buy an REIT sector index fund, and07:17it might not do well but it’s not going to zero.07:21That started taking off.07:22ETFs is supposed to be better, and indexations are better.07:29People like me could talk about it and analyze it and start coming up with a very amusing07:34and hopefully illuminating examples of how distorted it was becoming.07:38It was still subject to a lot of argumentation that passive investing, which is supposed07:42to benefit from the free rider principle, we just want to participate in the wave of07:48what active managers do when they contest in the open market and the set clearing prices07:53and just participate without changing anything.07:55We could argue that they’re beginning to actually alter clearing prices but those are arguable.08:02We could argue that the only reasons they were outperforming active management then08:10that came to be there are any innumerable articles about it, that active management08:14has just been proven to underperform indexes.08:19We could argue that simply because they were pushing up their own very limited number of08:25securities in which they traffic people and understand that you have to elucidate that08:29also why that is, but that was all arguable.08:33Now, we’ve got some proof because now, we’ve got a 20-year track record for ETF -based08:42index investing and history has spoken, and they all found one thing.08:48The S&P; 500 for the last 20 years has got roughly a 4.5% annualized return.08:59If you go to the MSCI All Country World Index, less than that, maybe 3.5% or 4%.09:06If you bought a 20-year Treasury note, and you’re in 1999, you could have bought about09:10a 6.3% or 4% yield.09:12MIKE GREEN: Remember it well, yes.09:13STEVEN BREGMAN: You could have done just fine.09:15They didn’t even perform as well as called a risk free Treasury but 20 years is a long09:22time.09:23Then if you take another look at what we think is the primary risk to investors, and the09:31primary responsibility of an investment advisor is not comparable returns to some other manager09:38or to some set of managers or some abstract index or an index with some abstract purpose09:46or importance, but at the very least, to maintain someone’s purchasing power over time, and09:52hopefully to increase it.09:54Well, the measure of monetary debasement over these last 20 years, M2 money supply expansion,09:59has been more than 6% a year.10:01In that sense, if you owned the iShares S&P; 500 index over the last 20 years, you actually10:09lose in purchasing power.10:10MIKE GREEN: How do you disaggregate that, though, between the outcome versus the process?10:14Because if I were to point to active manager performance, almost by definition has to be10:20worse, because we’ve seen in aggregate, active managers underperform the benchmarks.10:24STEVEN BREGMAN: What are the benchmarks?10:28What if the benchmarks are rigged?10:29What are we going to be talking about here?10:31MIKE GREEN: Yes, exactly.10:33STEVEN BREGMAN: By the way, I should preface this by saying I’m willing to try to defend10:38it and I feel comfortable with that.10:41I think this is the– not just the United States but globally, we’re in the biggest10:45financial bubble ever that includes stock, include bonds.10:50Basically, it’s the entire set of financial assets worldwide.10:54It doesn’t happen in a vacuum.It happens because it’s unprecedented, but it follows on the heels of something whosecausality here, something else is unprecedented is there’s never before been a coordinatedglobal coordination by the world central banks to drive interest rates down to these artificiallylow rates.Now, people have caught on to this.I have books at home that have the evidence, the lowest interest rates in 5000 years.One of the things that’s happened is that it raises financial asset prices, makes peoplefeel good, but it’s actually very pernicious, because it transfers the risk and returnsbetween savers and borrowers.If you’ve done everything you’re supposed to as an individual, you’re a retired accountantor you’re an attorney or you’re a doctor, and you pay for your house and you’ve gota million dollars, $2 million saved up.11:52What’s $2 million times if you put it all into a 10-year US Treasury note in less than11:572% and it’s taxable, but even if it’s not taxable, what do you get?12:01You can hardly live on that.12:03If you don’t expect to spend your principal, you don’t know when you’ll die.12:07MIKE GREEN: Yeah, it’s a pretty extraordinary statistic.12:09STEVEN BREGMAN: It’s a crisis.12:11I like to differentiate, there’s a term statistic and then there’s a place for interpreting12:15for people, because it’s really a crisis, it’s a yield crisis, and people can’t get12:23yield.12:24What does that do?12:25There’s a dynamic to bubbles, they build over time and people owned a series of bonds, municipal12:36bonds or corporate bonds, or within a bond fund and little by little, their maturities12:41calls and the yield goes down because the coupon goes down, or the average coupon goes12:46down, because they replace it with lower coupon bonds and happens slowly.12:52Little by little, people realize I’ve got a problem.12:55Wall Street is a unique industry.13:00Among other respects, that is the only industry I know of, in which, if there’s sufficient13:08demand for a product, they can create effectively infinite supply almost instantaneously.13:16If someone likes a certain GM truck, they have to retool, there’s certain amount of13:22capital you got to put in, but they’ll sell you whatever you want.13:28What happens?13:30Some firms see, oh, there’s a need for yield.13:31Why don’t we create– it also helps the fee aspect.13:35Let’s create a dividend aristocrats ETF index.13:40You’ve got various kinds of companies like they collect the higher dividend yield and13:45so people, they go with their lead there.13:51You get less than 2% in the Treasury, if it’s looking good, 3.5% in this REIT index or this13:57dividend aristocrats index.13:59They put more money into bonds than they really should, been into equities than they should.14:07They’re doing what they can.14:09Then you have the dividend aristocrats fund and so forth and so on, but it’s important14:13to understand the magnitude of asset flows into index funds.14:21We’re talking about several hundred billion dollars every single year for a decade, it’s14:27actually been climbing until this past year, and what happens is when you have trillion14:33dollar asset managers, and they create a new fund, and it could be a $200 million fund,14:39a $400 million fund, a $500 million fund and there’s going to be a knockoff of one of the14:45competitors, as a pure business proposition, you’ve got some really bright people in the14:51back office, working up different packages of stocks, new indexes, and they tried to15:00make it work.15:02Let’s just say that they create a list that back test really well, that’s got a nice theme15:07to it and then they bring it to their managers, they managed it well, there’s a problem here,15:15is that you’ve got these hundred stocks, except in the nether regions of that list by market15:21weight, the ones at the bottom, they just don’t have the trading liquidity.15:25They’ve got so many shares per day of trading.15:28They’re an X percent, let’s say it’s equal weighted, and it’s X percent of your list15:34and we can’t go above certain liquidity limits that we set in place, we can only raise 10015:40million dollars for this.15:41It’s not even worth the time, barely pays for your salaries.15:46They go back to the drawing board and they fiddle with the rule set.15:49It’s a very simple rule set, and they simply drop out.15:51They find a way to drop those companies out.15:53It’s legitimate.15:55We’re only– we have this list, but only companies with above this much creativity or whatever.16:00Now, you drop those out and suddenly, you can raise $500 million.16:04That’s an example of why real practical purposes, the ETFs or their bond ETFs or stock ETFs16:13have trafficked substantially completely in large cap and mega cap stocks.16:20They really need basically industrial strength trading liquidity, which is why you find Exxon16:26Mobil everywhere they can put it and why you find technology stocks in funds where they16:35don’t belong, because Facebook’s really liquid, or Microsoft’s really liquid, to find a way16:40you can find individual stocks, like an Exxon Mobil or Microsoft or something else, and16:46you’ll find they’re in growth ETFs, they’re in value ETFs, they’re in momentum ETFs, they’re16:50in fundamental tilted ETFs, they’re in dividend ETFs, they’re everywhere.16:53If you actually look at it, it defies logic other than they need the trading liquidity.17:01There’s so many systemic risks in the market now.17:03What will happen is when something gets over done enough, when you get like a deep bear17:09market, you get a bubble, aside for the fact that they can go higher than you ever imagined,17:13more overvalued then you ever imagined, or lower, they become a variety of systemic risks.17:20One of them nowadays, systemic risk, set systemic risk meaning it’s going to affect substantially17:26most of the securities in the universe you’re talking about, a single variable and one of17:32those variables now– I know you’ve observed it and are concerned particularly, you study17:39it closely, is the concentration risk.17:43People are unaware of what the concentration risk now is.17:46They think they’re getting diversified.17:49Diversification semantically only just a name, because all the same stocks are being owned17:54by these ETFs.17:56The fund flows come in, the ETFs are– the indexes are price agnostic, there is no–18:04in their short list that makes up the rule set for inclusion or exclusion of ETF, market18:12cap, industry sector, PE, whatever it might be, those descriptive attributes, there is18:17no place for valuation.18:20It’s not on that list.18:21There are different ways to talk about the concentration risk.18:25Not too long ago, only a matter of weeks ago, I accounted up in the S&P; 500, the top 10018:33names, 20% of the names accounted, just happens that the numbers of this even 67% of the market18:40value of the index.18:43That’s real concentration.18:44Although we’ve never had concentration like that before.18:47They drive the market.18:49The asset allocation’s idea of shifting from one sector to another in terms of market capitalization,18:55it can’t happen anymore.18:57I think the figures for the Russell 2000, is it $2 billion and below?19:02MIKE GREEN: I think it’s a little higher than that actually now, but yeah, something like19:06that.19:07STEVEN BREGMAN: The sum, the complete market capitalization of all the Russell 2000 stocks,19:12it may only be several percent the value of the Russell 1000, S&P; 500.19:19Even if for the sake of argument, it were undervalued, let’s say it were undervalued19:24and people just wanted to shift some money there, they can’t.19:27You can’t have a thimble that’s a 5% or 6% size to accommodate that.19:35In one sense, people– they don’t know it, but they’re stuck.19:37They’re stuck in the dark, there’s nowhere to go.19:40They’re going to go to treasuries and earn a basically return that will [indiscernible].19:46I want to talk about that too, because the lie or the complete let’s say misapprehension19:53of indexation, talk about active managers you asked me before.19:57This is a long winded way of getting around to this response, which is that the indexes20:03have been buying automatic bid.20:07Every time money comes in, they’re required probably to buy and hold all the stocks they20:12own in precise proportions.20:14They’ve been buying their own book.20:18It’s arguable, pushing them up.20:23Therefore, this is not passive, if you’re not participating in whatever the clearing20:30price mechanism established by active managers.20:33In fact, one of the reasons why active managers have done more poorly is they have been the20:39bank of funds and you could– there are places to look and you can see on a given year, a20:45given quarter, so much money comes out of active managers, and pretty closely, that’s20:50the amount that goes into indexes.20:52They’ve been the bank providing that, therefore, like [indiscernible].20:55You might like what he does, you might not like what he does, but give him this.21:00He sticks to his knitting.21:01He hasn’t bent.21:03He’s not going to do what he doesn’t want to do in terms of his, let’s say the integrity21:07he has over the investment process.21:09He loses money every quarter, but he’s got to sell and you get redemptions.21:13He’s got to sell things that aren’t in the indexes, there really is no buying interest.21:19He owns undervalued securities, and he’s selling them, make them even less, more undervalued.21:24The system is gamed, I don’t think the conclusion on that basis that indexes have proven active21:33managers to not be able to perform as well as index is false.21:38There’s another anecdotal bit of information I like.21:43I made a list a year or so ago, of like a half a dozen really well respected value managers,21:50value managers who had 20, 30 years of ongoing investment performance over obviously, over21:56multiple cycles, superb performance, like really stellar, well respected, not anymore.22:03Why?22:04Because in the last five or 10 years, they’ve underperformed plus five years, the underperformance22:10year by year, and back to back.22:13Astounding.22:14We’re talking about not just five percentage points, 10 percentage points, 15 percentage22:18points a year.22:20If you take people like [indiscernible] and Chuck Royce and Sequoia Fund and so forth22:25and so on, even Carl Icahn, first of all, there’s information content in that.22:33How can you take, let’s say, half a dozen or 10 people like that, with proven serial22:41success, and suddenly in the last five years– and by the way, they all have different approaches.22:49They have an affinity or skill set for a different type portion of the markets, or style of investing22:56or method of doing it.22:58There’s very little overlap in their portfolios.23:01Suddenly, altogether, they got stupid or incompetent at the same time.23:07It just is quite improbable.23:09Therefore, there’s information content in that which is maybe something else is going23:12on, and I can talk about why the S&P; 500 underperform for 20 years the All Country World Index has23:21and get into that.23:22Before I give you this more specific, another more overarching observation, have you heard23:27of the or read the Bessembinder Study?23:29MIKE GREEN: No.23:30STEVEN BREGMAN: You’re going to like this.23:32I know if you’re going to read some point in the next week or month.23:35My business partner, [indiscernible], came across this and he wrote about it.23:41Let’s call it the academic invalidation of indexation as practiced.23:46This is a guy, Hendrik Bessembinder.23:48It sounds like someone from the 19th century, but– MIKE GREEN: This were in Germany but23:53yes.23:54STEVEN BREGMAN: He’s a professor at Arizona State University.23:56Two years ago, he published a study.23:59It’s a 90-year study of equity returns 1926 to 2016 but it’s entirely different than what24:07we’re used to.24:08It was called little insouciantly, do stocks outperform treasury bills?24:13I tell you, this is a seminal piece of scholarship.24:16It’s like a significant contribution to the field of study of finance, and essentially24:23it invalidates indexation.24:26What he did is the differences that– I used to wonder about this, the reliance as a standard,24:35this is the way it’s supposed to be when you measure performance returns for people.24:40It’s all based on this time weighted percentage rate of return.24:45That’s because it’s designed for institutions, how to compare managers, but individuals,24:52they need to measure their performance in dollars.24:55That’s not how it’s done.24:56All the studies are done that way.25:01The difference is that his study was based on dollars of wealth creation.25:07How much did each company over that period of time contributed in terms of dollars of25:13value increase as opposed to just percentage return?25:17Because that only– I say “only” advisedly, only compounds at 12% a year for 20 years,25:23which is actually really good and creates a lot more dollars of wealth for some small25:28company, in a percentage basis, it’s a rocket ship for 10 years but doesn’t really have25:34that much impact on the total index.25:37This study encompasses over 25,000 different stocks.25:42Of those 25,000 call it 700 stocks, only 1092 by 4% of the total were responsible for all25:53of the $34.8 trillion of wealth generated from the equity market between July 1926 and26:00December 2016.26:0296%, the other portion of all equity studied performed no better than treasury bills.26:09He can draw some very quick conclusions from that or propositions.26:14Indexation as practiced is purports to be a representation of market reality, but it26:24really doesn’t mirror market reality.26:26That’s not how the market works.26:28If 96% of the securities don’t provide a higher return in treasury bills, then when you trade26:34one stock for another, you only have a 4% chance, about 25 chance that the new position26:42will outperform cash.26:44That’s the best argument I’ve heard so far for buy and hold investing.26:48As that 4%, that’s why indexes ultimately undiversified themselves.26:54We wrote exercises about this a long, long time ago, that you just buy a list of stocks.27:03This has to be large enough to encompass a normal distribution.27:06However, that’s 20 stocks or 10, or whatever it is, 30.27:09Most people say 35, statistically is a good number.27:12You just don’t touch it.27:15Then the two smart ones, now you don’t know which one is smarter then, they will outperform27:22over time.27:24Over time, the performance of the account will converge upon the performance of those27:27two stocks.27:30The account will get more and more volatile but it’ll also outperform.27:35The thing about indexation, though, is for a variety of reasons, it will never permit–27:42it can’t permit that to happen.27:43Number one, they’ve placed caps or limits on what a position size can be.27:48Number two, there are constantly new entrants, Uber comes along, IPO, they have to make shelf27:54space for it, they have to reduce so they get diluted over time just in a natural way.28:00Anyway, as practice, one can see why ultimately the indexes can do as well as for variety28:10of reasons, the historical returns suggest.28:11MIKE GREEN: Yeah, I think there’s definitely some truth to that.28:15I think the underlying dynamic of survivorship bias, the inability to fully participate,28:22the other component, of course, is that the participation of the individual is not reflective28:27of the performance of the index.28:29Particularly if you’re buying in an ETF where you’re paying bid versus ask, which can be28:33quite narrow, but accumulates over time.28:35To me, the most interesting thing that’s happened with the index space, though, is actually28:41almost the exact opposite.28:44Because we have functionally locked in a group of stocks that money gets continually piled28:52into.28:53The most popular mutual fund is the Vanguard total market index, where functionally every28:59stock, there are some that are excluded for sampling and liquidity purposes exactly as29:02you’re describing, which get excluded and then continue to underperform which naturally29:07draws the eye of astute value investors such as yourself, which locks in potentially underperformance29:13even as you’re accumulating a greater ownership of an undervalued asset relative to an index29:18that’s playing off of momentum.29:22That type of dynamic perversely actually ends up really damaging the capitalist system.29:30Because companies participate, regardless of their underlying fundamentals.29:34STEVEN BREGMAN: Yes.29:37Now, I’ve changed the way I talk to clients about the market and the bubble and so forth.29:44What I do find people can readily assess our bonds.29:50Bonds have many fewer variables.29:52You’ve got a coupon, you got a maturity date, and if it’s money good, you’re getting 10029:58cents on the dollar at the end period.30:01If you’re not sure it’s money good, that’s usually pretty determinable.30:04That’s not such a mystery usually.30:06I now can use this to talk about the falsity of the way modern portfolio theory and efficient30:18markets and blah, blah, blah, the way that portfolio management is practiced in an institutional30:25basis, which filters into these asset allocation models, which induces people or their investment30:30counselors to put them into certain asset classes and certain indexes and so forth,30:37the basic false premise of it.30:41You mentioned the most popular ETF by size, which is the Vanguard total market.30:46Well, in the bond realm, the fifth largest ETF is the iShares 20-year plus Treasury ETF,31:02TLT is the ticker.31:07Last year, actually through November, it got $7 billion of new assets which increases assets31:13by 65%.31:15Spectacular.31:16The problem is that the average investor who owns TLT probably thinks they did pretty well31:23last year, and they’re very pleased with it.31:25They think it’s a high return low risk investment.31:28Why?31:29Well, first of all, it’s up 14% last year, what they don’t look at necessarily and know31:33to look at is that the average coupon is not even 3%, 2.99%, which means that 80% of their31:41term came from appreciation and that that appreciation only happened because the government31:45lowered interest rates or interest rates were lowered, got lowered.31:49Well, what if they say, what if it keeps getting repeated?31:54Well, there’s obviously a limit to that.31:56Even so, the majority is still only 2.29%.32:00You hold that for 20 years, the same more or less, you can expect that’s what you’re32:03going to get and that is below the rate of inflation.32:10The government is telling you that you are guaranteed for 20 years to this purchasing32:15power every single year.32:17If M2 money supply, which in the last 20 years has been 6.2% or so, last year, it was more32:27like 7%, the last six months, it’s more like 9% on an annualized basis.32:35That’s monetary debasement.32:36If you’re going to lose 4% in terms of purchasing power every year, that means in 10 years,32:46the hundred thousand dollars, the million dollars you put in those 10-year treasuries,32:51those 10-year treasuries will be worth half as much in terms of purchasing power, you32:55could be in real trouble.32:56If the amount of income you’re able to get off, it was just enough for you in year one.33:00That’s an existential crisis for people and they sense it, but they don’t know how to33:05evaluate in terms of what they’re buying.33:07The other problem is how Wall Street describes risk to them.33:12If you go to the TLT website, right on the main page, I’ll tell you, it’s got this duration,33:18it’s got this convexity.33:20I don’t know what that is.33:21MIKE GREEN: You can know what it is, but yeah.33:25STEVEN BREGMAN: Investors aren’t conversant with that.33:29What they don’t know, in terms of risk is that if 20-year interest rates, just for the33:37sake of argument, next year, go from 2.29% which is what is about the [indiscernible]33:43and that is, to five, that they’re going to lose 30% of their investment.33:49They don’t know that.33:50MIKE GREEN: Perversely, though, if that happens because of the higher coupon, they’ll actually33:54end up with a higher total return over that 10-year period.33:58While the immediate impact would be negative, and I spent a bunch of time digging into exactly34:04this topic, post the global financial crisis because I was trying to understand what are34:10the real risks in bonds.34:11The real risks and bonds are exactly as you’re describing that the rates go low and staylow forever.STEVEN BREGMAN: They could stay low.Well, I’m convinced, and this is completely unscientific, this is completely non-technical.I’m a big believer in incentive systems, and basically, behavioral psychology and behavioralfinance, is that interest rates will stay very low if the government can help it fora very, very long time.If it can help it, simply because it can’t afford for them to go up.34:46MIKE GREEN: I agree with that.34:47STEVEN BREGMAN: They’ll do whatever they have to.34:49Eventually, they create a real crisis of one sort or another.34:54MIKE GREEN: I think the interesting challenge is thinking about it from the standpoint not34:57of a valuation system which most people tend to focus on the idea that low interest rates35:02translates to higher valuation, but you’ve referenced them to a couple of times in this.We live in a collateral based credit system.What happens when the government cuts interest rates?The price of the bond goes up.What does that do?It provides you with additional collateral to then go and buy stuff.It’s theoretically worth more even though it’s going to depreciate towards par.I think that is actually one of the key underlying dynamics.We’ve effectively built a system predicated on collateral.It’s not that the interest rate is really what’s driving it, it’s the bond price.35:38What do you see as the alternatives?35:39STEVEN BREGMAN: In today’s world, we have basically a bifurcated market in terms of35:45clearing prices, and how those clearing prices are developed.35:50That is either you’re in the indexation.35:52Above the ETF divide, you’re in the indexation sphere of activity as a security or you’re35:57not, and even excluded by the relatively simple rule sets of the ETF universe because you36:06don’t have the– you might be a large cap company, I’ll name a company, I’m not recommending36:12it or not.36:13AP Moller Maersk.36:14I forget the market cap, could be 30 billion.36:17It’s the largest shipping container company in the world.36:19Aside from the fact that it’s not a US based company, but even if they were, the thing36:25is the Moller family, I don’t remember, but they owned 45%, 55% of shares.36:32Therefore, the effective market cap is way, way lower, it doesn’t suit.36:37It also doesn’t have the volatility return characteristics you might want because the36:44shipping industry has been in depression for years.36:47That’s not going to be in an index.36:48What will happen is, if you’re below what I call below the ETF divide, there is no institutional–36:56for the original purposes, virtually no institutional interest in you.37:01There aren’t any analysts covering you because they can’t get paid to cover you.37:05Therefore, for the first time in my career, which only goes back to 1982, you can have37:13companies, you can get a free lunch– now, there is no free lunch, you have to figure37:17out like why it seems free, otherwise, you’re on thin ice.37:23You can get a free lunch in all sorts of ways because the excesses in the indexation centric37:30securities market has created deficits, in clearing prices and valuations in below the37:38ETF divide.37:39What will happen is that there are companies now that are undervalued not for any fundamental37:45reason, meaning fundamental adding to their balance sheet or their income statement or37:50competition or technological displacement or regulatory problems or management issues.38:00How can you find a decent company trading at a low enough price that you think you’re38:06getting some discount or margin safety?38:08Very, very difficult.38:10You really couldn’t.38:11What you needed to do traditionally is find some company with a blemish, the CEO absconded,38:17they lost a big contract, whatever it might be, stock drops.38:21Then our job is to try to evaluate that and find out whether that insult is transitory38:27or permanent.38:29Whether it’s structural or it’s superficial.38:32I say you know what, in two years or three years or four years, somewhere beyond the38:38standard institutional investment time horizon, I can’t take the time risk, I’m willing to38:41take the time risk.38:42That’s what I think my advantages is, is it’ll be fine.38:48In which case, what’s the normalized earnings on this and what’s some a normalized perfectly38:52average valuation?38:53Oh, I’ll do pretty well.38:54I’ll buy it and wait.38:56That’s what you have to do.38:58Now for the first time, you can buy companies that are deeply undervalued relative to some39:03objective measure, their assets and their assets are profitable, or their earnings or39:09their free cashflow, whatever it might be, good balance sheets, there’s no blemish on39:13them.39:14The only reason they’re cheap is that they’ve been excluded from the indexes, probably either39:22one of two reasons.39:23They don’t have sufficient trading liquidity.39:25Large companies, small or they don’t fit the shape parameters, meaning it might be a trust,39:36or it might be some odd– it might be a multi-industry company.39:42It’s not exactly– it might even be a real estate company, but it’s not a REIT, they39:47want REITs, they don’t lend to development companies.39:50What’s happening now is that if you’re willing to look– if you have the license as an investment39:57advisor, to look below the ETF divide, you can find everything you want.40:02It’s possible.40:03It’s really possible.40:05You can create for somebody, you can create a portfolio with bonds and other income securities40:11or equity series that’s got, let’s say, I’ll give an example, let’s say a 4% gross yield,40:19dividend and interest, some of which is tax exempt, that has strategic, important strategic40:27flexibility, let’s say 20% in cash reserves, that also has both bonds and equities in there40:34that have plenty of optionality of a high order continued to force or modest but steady40:45state internally generated growth in shareholders equity overtime and therefore income production.40:56You can get a yield that’s twice the 10-year Treasury rate.40:59You can have a purchasing power protection.41:04You can get everything you’re supposed to have.41:07Now, is it going to track what’s happening in the marketplace?41:10No, but that’s not my goal.41:11I have a different objective.41:13You can do that, but you can’t find it in the– same with bonds, I heard you discussing41:21this is that you find a bond that’s sure valuation, perfectly good.41:28It’s money good for the next four or five years till it matures but it’s not an index.41:33It might not be a large enough issue, you can buy a 7% yield and it’s not a junk bond.41:40MIKE GREEN: Interesting.41:42Well, I think that’s going to be the interesting question.41:46A lot of the dynamics that you’re discussing, we both experienced in ’99 to 2000.41:51Similar components I’ve talked about, homebuilders right before the big housing bubble being41:55priced at half bulk value.41:57The challenge in my mind, and we referenced it a little bit before in the discussion,42:02it says that we have actually created such a fundamental flaw in the structure of how42:07assets are collected and how money comes into the system.42:10It’s not clear to me that we’re going to be able to capture those means reverting characteristics42:15that you’re highlighting.42:17If 95% of the money that comes in, if millennials who are going to be the millennials, and those42:22who come after them are fundamentally forced into passive investing styles because of regulatory42:30systems, and gain no experience whatsoever, are we setting up the conditions in which42:37we destroy those mean reverting characteristics?42:39I would highlight is a good example, the travails of FedEx relative to Amazon.42:44Amazon functionally has a zero cost of capital because of the dynamics of inclusion that42:52you’re highlighting.42:54They’re able to make investments that would be uneconomic for almost any company to make42:59certainly a large scale logistics company like a FedEx, they’ve been able to build a43:04second FedEx, something we would have thought of was having a giant significant moat for43:09an extended period of time.43:11They’ve been able to replicate it in the period of roughly three years.43:14The real fear that I have is that we’ve broken that characteristic and I think it’s going43:18to be fascinating to see if it reverses itself.43:22STEVEN BREGMAN: You bring up two points which I think spark some responses.43:27One is you’re pointing to something that people forget generationally.43:31Every generation, there are some companies that for 20 years, 30 years, grow and grow43:39and grow and they become recognized.43:42In the course of someone’s life, their personal experience, they’ve been there forever.43:46They’re stable.43:47That’s not how business works.43:50They’re not stable.43:51What’ll happen is that’s another reason why indexes have trouble doing well, which is43:58that one of the reasons why– another reason why they get this 4.5% annualized return since44:03’99 in the S&P; 500, is because if you look at the largest 10 companies in the S&P; 50044:06at the end of 1999, most of them have suffered displacement by competitors.44:14IBM was displaced by cloud computing.44:20Dell was displaced by the emergence of the iPad, and so forth and so on.44:29That’s natural, because the largest companies represent the easiest largest targets for44:36a national competitor to secure customers and revenues, and people think that an Amazon44:46or a Facebook or a Google are somehow impervious to technological displacement.44:54If you take a look, there are a whole variety of companies and technologies or just plain45:01old competition that is beginning to make inroads.45:06We don’t know which will work or not, but to give you a nontechnological form of what45:13can happen, the margins, the returns on equity of the modern Information Technology slash45:21technology companies like Facebook, Google, Twitter, are simply enormous.45:27The stated ROEs might be 30%, or something like that, depending on, but really, it takes45:33all the cash and marketable securities and the market securities in the balance sheet,45:37which are nonproductive, they don’t need them to do the business.45:39You take that away, the returns in equity could be 50%, 60%, 100%.45:44It’s simply like unheard of.45:46It’s not really sustainable.45:48Someone’s going to come after that.45:49Now, how can they come after it?45:51Well, Dell, which displaced all sorts of other companies in manufacturing PCs by doing a46:01direct to consumer approach, and they were willing to sustain a lower profit margin to46:07get there.46:10Dell is now getting into cloud computing.46:16What does that mean?46:18It sets you off up a warehouse, and you buy all the equipment and you do it.46:26Now they’re going to compete.46:28By the way, there’s a food fight going on now.46:32Amazon and IBM, IBM needs to succeed in cloud computing to protect itself now.46:39Dell’s getting involved.46:41Amazon at some point, there’s going to be margin compression.46:47One of those players is going to be willing to take a lower margin just like in ETFs.46:53Here’s why I don’t think it can keep going on.46:58We talked earlier, the bank of funds for suctioning out of active management into the passive47:11management, that’s finite.47:13As of a year ago, I think there’s a Fortune magazine article, they did a study.47:20They thought that we passed the 50% dividing line, very significant one, of all passive47:30assets as a percentage of all investment assets in public markets.47:39That has all sorts of implications.47:40You’ve looked into them yourself.47:42There’s a law of large numbers.47:44Now, there’s 50% float available to them.47:48Now, it’s less, now it’s 49.47:49If that was a correct number, 48.47:52Every year, in order to maintain the same constant pressure on the automatic bid on47:59all the stocks owned by old ETFs and bonds, they need larger inflows each year, like it48:06was $350 billion last year, whatever the number was, now it’s going to be more but the pool48:12from which they’re drawing is getting smaller.48:16That can start to accelerate real fast.48:19When the flow of funds into indexation slows, or stops, or turns negative, there’s no more48:27automatic bid and the marginal trade which is effectively indexation has been for the48:33last 10 years and increasingly in recent years.48:37The marginal trade, like the baton is handed over to the active manager and the active48:43manager, I just referred [indiscernible] because it occurs to me.48:48He’s not buying a blue chip.48:50He’s not into technology, but he’s not buying a day now mature trending into cyclical blue48:57chip, like Coca Cola, or McDonald’s or Procter and Gamble, which actually had sales declines49:04in recent years, at 25 times earnings, just not doing it.49:07Where’s the bid going to be?49:08This is before we get to other dynamics.49:10MIKE GREEN: The pushback that I would make to that is that the old people, for lack of49:16a more descriptive term, are the ones who own active managers.49:20The young people who continue to have inflows are those who own passive vehicles.49:24There’s nothing that actually says that active manager ever gets to bid again, there’s no49:29rule of the universe, there’s no law that says that has to happen.49:32It’s unfortunately catastrophic, but there is no law that requires that.49:38That I think is going to be the really interesting question is, if the system can’t find itself49:43self-regulatory.49:44Sure.49:45STEVEN BREGMAN: The rules again, when you get extremes, you get other possibilities.49:51Since it’s fully disclosed, the precise percentage positions in every single ETF, you know exactly50:01what they own, you know how many total dollars of assets are every in single ETF.50:06At a certain point, if the inflows get small enough, even with a lower age demographic50:18making contributions, it’s going to start to peter out.50:22We don’t know, I’ve never worked with these kinds of numbers the way you have but at a50:27certain point, if it looks like it’s tipping, you can have short sellers who know if there50:33are going to be any redemptions, net redemptions.50:36They’ll know exactly how much is being sold of every single security.50:42They have almost unlimited quantities of assets that they can front run.50:49That’s a different scenario.50:50MIKE GREEN: Yeah.50:51I worked through the numbers, and I think it’s going to be interesting to see how it50:54plays out.50:55I don’t think– STEVEN BREGMAN: It’s more dynamic than that.50:56MIKE GREEN: It’s more dynamic than that.50:58I think the real risk is that we’ve seen short sellers already eviscerated by the inflation51:03that I think is caused by the passive investment process.51:05STEVEN BREGMAN: But the passive investment process has still– that’s why those short51:09sellers are missing an important element.51:15Money’s flowing in, to the tune of hundreds of billions of dollars a year.51:18You can’t get in front of that.51:19MIKE GREEN: Well, to your point, though, that money is coming out of the active managers,51:23are flowing into the passive, ironically, if you have that inflation, the supply of51:28assets that’s available to the active managers goes on much longer.51:32We’ve probably seen this, there’s very few stocks, you highlight it yourself, unless51:36they’re outside of the indices, which Vanguard total market index had very few stocks that51:42actually are outside of that unless they fail to meet float dynamics or ownership dynamics.51:46STEVEN BREGMAN: Yeah, but if they’re, 100th of 1%, they’re in de facto in a de facto sense,51:53but it’s meaningless, statistically meaningless.51:55MIKE GREEN: Yeah.51:56No, I think that’s right, but that’s exactly the point that I’m making, which is the assets52:00that are owned by the active managers who by and large, buy stuff with similar characteristics52:05to the passive indices, you being one of the notable exceptions, they can experience that52:10same inflation and so one of the big push backs I have is the idea that value stocks52:13are cheap as they were ’99.52:15I don’t see that at all.52:16I think there’s elements exactly as you’re describing.52:19I think we’re going to run out of time, but one of the things that I think is going to52:23be so interesting, and I’d love to come back and sit down with you in another year is thisunderlying question of, is there a selflimiting feature?Can this actually wrap back around?STEVEN BREGMAN: I think what’s going to happen is there are going to be some serious socialproblems.MIKE GREEN: I agree.STEVEN BREGMAN: When you see serious tumult in nations, social tumult, it really oftenfollows when there’s been currency debasement, loss of purchasing power, inability to liveon your investments or your income, people get desperate, then things change, desperation,and we’re heading that direction just a lot more slowly than Greece or Venezuela.MIKE GREEN: I share those sentiments exactly.STEVEN BREGMAN: As I mentioned one term, it’s necessary for anybody I talked to, to hearwhether they are willing to let me work with them on it or not, is the ultimate hedge againstcurrency debasement.It might never work, it might never be necessary, but it can save your financial future andit can be done in such a small amount that will never harm you if it doesn’t work, whichis a fixed issuance meaning nondebasable cryptocurrency.If the time ever comes that people in various parts of the world feel they need a non-debasablecurrency, the returns can be on the order of hundreds of times your money.MIKE GREEN: I share those sentiments.54:06Historically, it would be gold.54:08We don’t know if going forward, it’s going to be a crypto asset but I agree with you54:12that those types of nonlinear properties will become an important part of any asset allocation54:17framework.54:18I really look forward to sitting down with you again and sharing these thoughts.54:23STEVEN BREGMAN: I actually enjoyed listening to you more than talk with you.54:27Thank you.