The End Game Ep. 13 – The Return Of The Lord Of The Dark Matter

The End Game Ep. 13 – The Return Of The Lord Of The Dark Matter

December 21, 2020

James Aitken makes a very welcome return to The End Game to take a look back at 2020 and a look forward to 2021.

Where did he get things wrong and why? What went according to his forecasts, and, most importantly, what has this turbulent year taught him that will help him in the future?From the dangers of ‘Big Dicking it’ to Robert Shiller’s nasty case of FOMO to the curious birth of the Equity Vigilantes, James shows precisely why his thoughts are so indispensable to his clients.Oh, and for all you crypto zeal…fans out there, this is a conversation you won’t want to miss – albeit one with a potentially nasty sting in its tail…

The Grant Williams Podcast
The End Game Ep. 13 - The Return Of The Lord Of The Dark Matter
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Grant and Bill welcome James Aitken, The Lord Of The Dark Matter back to The End Game for a conversation guaranteed to have your head spinning.

From the reflation trade, to the death of the Bond Vigilantes and the rise of the Equity Vigilantes as well as the things that could possibly go right in 2021, James looks back on the last year and ahead to the next 12 months in an extraordinary trip around the macro world.

Beginning with the dangers of what he calls ‘Big Dicking it’, James walks us through a wealth of macro possibilities before alighting on China’s Digital Currency Electronic Payments system (DCEP), which he believes to be the biggest potential change to the financial system since the Bretton Woods agreement.

An unmissable conversation…

 

Grant Williams:

Before we get going, here’s the bit where I remind you that nothing we discussed during the end game should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. And now on with the show.

Grant Williams:

Welcome everybody, to another edition of The End Game. Joining me as always, because it wouldn’t be The End Game without him, our man in Seattle himself, Bill Fleckenstein. Hi mate.

Bill Fleckenstein:

Hello, Grant. How are you today?

Grant Williams:

I am well, I’m well. Looking forward to our first returning guest of the series.

Bill Fleckenstein:

Yes, well, so I guess without further ado, we should just jump in and talk to James AKA, the Lord of the dark matter.

Grant Williams:

The Lord of the dark matter, James Aiken, who was, what, our second guest? Right after Marc Cohodes.

Bill Fleckenstein:

Right.

Grant Williams:

…in a headlock was the first real guest we had.

Bill Fleckenstein:

Exactly.

Grant Williams:

No offence Mark, if you’re listening. And, James has very kindly agreed to come back on and sit and chat with us over what’s happened this year and what he expects to happen next year. So, as Bill says, without further ado, let’s get to the Lord of the Dark Matter.

Grant Williams:

James, thank you mate, for coming back and doing this again.

James Aitken:

Oh, you’re welcome, Grasshopper.

Grant Williams:

We thought we may have scared you off the first time.

James Aitken:

No, it was so entertaining. And what listeners missed is the hour of banter afterwards.

Grant Williams:

Right? Exactly.

Bill Fleckenstein:

Yeah. You were our first legitimate guest. We can’t quite count Mark Cohodes as a real guest, since he was one of the schemers to the plan in the first place.

Grant Williams:

Exactly right. Many wouldn’t count him as legitimate, except for this platform that’s for sure.

Grant Williams:

And we love him anyway.

James Aitken:

I’m not going to touch that one.

Grant Williams:

No, probably best not. Well, look. Listen, James, the reason for our reconvening around the cauldron is twofold, really. One is to hopefully take a look back at what has been a… An extraordinary, unprecedented year. I hate using that word, but I kind of get forced to a lot these days. And then to kind of get your take on what’s to come in 2021, as we kind of make the transition to then. Obviously, there’s vaccines in place, which we didn’t have before. There’s all kinds of things happened.

Grant Williams:

So I’d love to kind of get a big picture download of your thoughts on 2020 as a year, and then Bill and I can kind of dig into that. And perhaps then the three of us can kick around 2021.

James Aitken:

Yeah. Sounds like a plan. And let me start with a bit of a framework and it’s going to be a little bit blunt, but all my friends in Texas have a very great phrase to describe showboating. And they say, “ XYZ was just trying to big dick it.”

James Aitken:

So, they’re out there. You know, it can apply to turning up to a dinner party with an ‘82 Bordeaux or turning up with a shotgun to a quail shoot or whatever. But, the reason I start with that rather direct metaphor of big dicking it, is because there’s a lot of big dicking going on right now in finance. And I think it might be useful for us, the three of us to try a slightly different approach.

Grant Williams:

Amen to that brother.

James Aitken:

And I think, Grant, that it might be useful to reflect on mistakes.

James Aitken:

And before we start to think about what’s going right, and what might one own entering 2021, or even today, I think we ought to reflect on this extraordinary, humbling year. And for all the things that have happened, if I was to arrive at the biggest mistake I made this year was needlessly, over-complicating too many things. And top of that list would be, as Bill knows in particular, investing hours and hours of my time reading the fine print of all these Fed facilities or other central bank facilities.

James Aitken:

And you know what? It didn’t matter. It just didn’t matter because the real story was that for the first time, just to use the Fed, for example, the Fed was directly supporting primary and secondary credit markets, or at least doing it in a more blatant way than the various Maiden Lane vehicles. That’s really important.

James Aitken:

And then related to that, the other thing, and of course, there’s a little bit of hindsight bias speaking here, but that’s the whole point when you’re reflecting on your errors. The other mistake I made was needlessly, over-complicating the arrival of fiscal policy. And if you just said, “Right, what are all those people doing? Where are we going? Okay, I’m not going to look at another COVID chart.” I’m just not, it doesn’t matter anymore if you are a market participant.

James Aitken:

I could get on endless conference calls with epidemiologists, didn’t matter. It didn’t matter. And so, I want to call myself out because I’ve made plenty of mistakes in 2020, one of which was not being aggressive enough in buying things. But the primary mistake was needlessly, over-complicating the Fed’s response, other central bank response in the context of fiscal policy being turned on in a very big way.

Bill Fleckenstein:

So, James, just to be clear, what you’re saying is that because of the stepped up fiscal response… Once for instance, the Fed decided to cross the Rubicon with the SPV that the treasury set up for them.

Bill Fleckenstein:

The details literally don’t matter anymore because they’ve indicated they’re willing to do whatever it takes to use Draghi’s expression. And therefore, if you find something that details that would’ve hung them up, they’d have just done an end run around it? Is that kind of what you mean?

James Aitken:

Yeah, that’s exactly it. And I think a phrase I’ve used, or been forced to use a lot of, on a lot of occasions over the past dozen years or so, is that it often pays to leave your brain at home.

James Aitken:

And you raise, ‘whatever it takes’. Well, that was a great moment to leave your brain at home. Why it won’t work, or he won’t be able to do QE didn’t matter. There’s an added layer to this, which is valuations. And if we use the metaphor of ‘whatever it takes’. Who wasn’t short, European banks? Who wasn’t short or underweight European credit of all kinds, you know? And if a new actor walks onto the stage and says, “Hey, I’ve got this.” And the initial evaluations are quite stretched on the downside, all it takes is one or two people to cover and you’re off. And that’s not a bad way of thinking of the March, April period. I mean, to be clear, it was obvious to quite a few people at that time. They were buying with both hands saying, “Look, this is bad. It’s grim, it’s complicated, it’s messy, but, I can see that the reaction function is “that’s all I need to know because some of these evaluations are too compelling.”

Bill Fleckenstein:

I understand what you’re saying. I think perhaps you may be being a bit too hard on your viewpoint from this perspective. I don’t think there were that many guys that were that clever, that were buying, that saw that it was going to turn.

Bill Fleckenstein:

I think, and again, this is the market. We don’t know.

James Aitken:

Sure.

Bill Fleckenstein:

It seems to me that the Mike Green discovery, so to speak, the size of the passive flows, which didn’t really get shutdown.

Bill Fleckenstein:

Mr. Automatic showed up with buy tickets and it stabilized, and then maybe a few guys joined in and maybe five guys covered a few shorts. I’m not saying you’re not right, but I’m saying, I firmly believe there was an element of that going on. And so I think it was harder to see your way through that than maybe you’re suggesting that some guys it was easy for.

James Aitken:

Yeah. I think there’s a structural element that more and more people are aware of and, you know, kudos to Mike, who’s done all his own work on this.

James Aitken:

And as a result of that, and as a result of Mike’s generosity on Twitter in particular, I just think it’s fair to say that a lot of people are now quote unquote ‘experts’ on the passive flow.

James Aitken:

But, Bill, to make it tangible for people listening, let’s just reflect for a second on what happened in late January and early February. It was absolutely clear by the end of January that this was going to be a big mess. And then by the end of January, China was shutting down, everything left, right and center. And the market assumed, well seemed to assume that, “Oh, it’s just a Chinese thing. It’s contained to China.” Even though it wasn’t.

James Aitken:

And if you look back to the first two weeks of February, the stock market went straight up and you’re like, “How can this be possible in the context of this obvious pandemic?” Even though it hadn’t quite been labeled a pandemic, although soon it would be. And that speaks to the structure of these markets, because the only people you’d think who were possibly buying stocks with both hands into the teeth of a massively, obviously disruptive pandemic must be non-price-sensitive investors.

James Aitken:

In other words, investors, if we can call them that, who are only focused on quantity and do not care about price. And it’s interesting to just go back and look at some of these charts, which I did the other day of that transition from January to February. It’s just astonishing in the context of what was happening.

Grant Williams:

James, let me jump in, there’s couple of things I want to ask you about there. Because I, like you, I stopped reading about COVID within a market context early on. Honestly, I wish it was… because I was smart. It was because I was just so tired of it all.

Grant Williams:

And the fact that I couldn’t find anybody who wasn’t an expert at either end of the thing, it was just exhausting. So I kind of shut that out and I quickly understood that it, the economy didn’t matter. It was all about markets.

James Aitken:

Yeah.

Grant Williams:

But what’s been interesting for me to read, literally in the last few days, there was a piece I saw yesterday from Morgan Stanley talking about they’re bullish because they see $2.8 trillion of liquidity being thrown at the markets next year. So, it feels, and I think you’re absolutely right in what you said, but it feels that now we’ve kind of reached the point where, as Chris Cole talks about the Ouroboros or the snake eating its tail, we can now get bullish because it doesn’t matter because more liquidity is coming because that’s all that matters. Is there a point in that self-reflective circle where this does become a problem because I’ve been trying to figure out where that might be and I’m struggling.

James Aitken:

To be clear, you mean that all this liquidity…

Grant Williams:

Is all that matters and it will just force the markets higher, no matter what, it doesn’t matter. We’re bullish because liquidity.

James Aitken:

Well, you could have argued that at various stages over the past decade.

Grant Williams:

For sure, for sure.

James Aitken:

I would say from the perspective of equity markets, one critical question would be earnings momentum. And if you look at the performance of certain companies year to date and the comps, they will have to meet year on year as we work through 2021, are almost impossible.

James Aitken:

So liquidity, yes, as a backstory, no question, it’s here to stay, but in terms of the passive machine, which is the related question, I mean, it’s here to stay as well. And it’s a very tricky one, if you are a stock picker. But then again, it’s a been a very tricky one for stock pickers for some time, because if you’re only a sliver, if you’re a bottom-up investor and you’re only five to 10% of daily turnover in your favourite stocks or your portfolio of stocks, you better be very comfortable with what all the machines are going to be doing otherwise you’re going to have day after day after day of just bleeding and it’s psychologically draining.

James Aitken:

So, to be clear, if I understood your question, the liquidity is not going away anytime soon. It’ll probably be at least as much as we’re seeing now will continue well through 2021 and potentially beyond, subject to what inflation does. And I think what will differentiate, this is my best guess, what will differentiate various asset classes in 2021, no prizes here, really. It’s just those companies that have been able to restructure this year are far better positioned to grow next year as the world slowly but steadily recovers, and also have considerable earnings momentum. And then in terms of dollar, the dollar and commodities and stuff like that, I imagine we’ll get into that later in the conversation.

Grant Williams:

But there seems to be that there’s, when you talk about that idea that liquidity was all that mattered over the last, what almost 12 years now? Which is absolutely right.

Grant Williams:

Until really this week, as far as I could see there was, there felt there was a need for some kind of intellectual veneer to be applied to your reasoning. We all knew that this was liquidity based, but now it feels as though Morgan Stanley came up and said, “We’re bullish because liquidity is coming.” It’s basically, yes, everything’s gone to shit, but so much liquidity is coming. You can just buy everything. And it’s almost like we don’t need to pretend anymore.

James Aitken:

Yeah. It’s the sell-side 00:14:02] equivalent of big dicking it. But hey, you know, the S&P’s going to 4,225. Yeah. Okay, cool. Could happen. But I think to, again, think about the practical considerations. You know, you look at someone like Bob Shiller and his Cape model, which a lot of people have been relying on for a long time to say, “Oh no, we’ve got to be really cautious here because Cape…” You know. Cape ratios and everything else tells us that stocks are expensive. In the middle of November, the 30th, Bob Shiller publishes a note talking about the excess Cape yield or ECY. In other words, Bob Schiller has got a little bit of FOMO. So, he publishes an updated Cape… earnings Cape yield, or Cape plus ECY to justify current valuations of stocks.

Bill Fleckenstein:

I believe the term for that, mate, is…

James Aitken:

Arse covering.

Bill Fleckenstein:

Cape before bad stuff.

James Aitken:

Yeah.

James Aitken:

I mean, shades of a lot of things that have happened before, but I’m just looking at the paper now and here we have this Nobel prize winner who we all know. And November 30th, “making sense of sky high stock prices. i.e. why I was wrong.”

James Aitken:

And FOMO is very powerful for investors. You know, you see your neighbour getting rich and you think, “Get me in, too.” Well, it appears that FOMO is just as powerful for economists and academics, as well. So, guess what? If discount rates remain really low, then stock prices can go a lot higher.

Bill Fleckenstein:

Wow.

James Aitken:

Give that man another Nobel prize, right?

Grant Williams:

Yeah. Well, not old superheroes fear Cape, I guess is the…

James Aitken:

No.

James Aitken:

That’s very, very…

Grant Williams:

[crosstalk 00:15:52] come from that one.

Grant Williams:

I think it just reinforces my point, James. Is that, okay, listen, we need, we can strip away the intellectual veneer, now. We can strip away that we have to sound like there’s a reason for this. And it’s just, because it’s going up now. I just wonder if that potentially presages a point in time where it doesn’t, because everyone’s assuming it’s going to go up. Is there any way you can see that being a potential death knell for the market? Or is that just going to be enough?

James Aitken:

Well, it depends. I mean, the liquidity is, to be clear, the liquidity is not going anywhere. I mean, even if inflation picks up a little bit into the second quarter of next year, no central bank in the world is going to turn any of this off. And on fiscal policy, just an important point here, we have had what you can call state-contingent monetary policy for many, many years, but there’s a wrinkle. Over the past decade, you’ve had central bank guidance, which has been based on central bank forecasts. Going forward, you’re going to have central bank guidance and reaction functions based on actual outcomes. And the Fed in particular has been very clear on that.

James Aitken:

In other words, we’ll keep pushing until we get what we want. In addition to that, you have some countries around the world deploying state contingent, fiscal guidance. And Australia has been at the lead of that with Treasurer Frydenberg stating over and over again, we will keep fiscal support in place unless and until the Australian unemployment rate is heading well below six.

James Aitken:

And that’s different. Now, it’s also the right thing to do when you’ve got such an output gap as the one we think we have. It’s completely right, but that’s a really powerful force when you have outcomes-based monetary policy. Working hand in hand with outcomes-based fiscal policy. Now, quite frankly, Grant, it’s what we were supposed to do in ‘09, ‘10 and ‘11, but we didn’t because of the Tea Party and the smash up in Europe. And that’s why the recovery took as long as it did. You know, we can call it, argue whether it was recovery or not.

James Aitken:

So, look, I’m not sure that everyone’s saying this was all about liquidity. I think that’s the backstory. But if we want to make us think about it in practical terms… Look for right or wrong, central banks are telling us that short-term interest rate markets will not be doing a lot for a long time to come. Okay?

James Aitken:

So, first point. Second point, for better or worse… And we haven’t eliminated the default cycle, but credit risk premia have been squashed. And if we take central banks at face value, they will not tolerate much of a rise in credit risk premia or widening of spreads. And then if we assume that long-term interest rates remain broadly well behaved, well, guess what? The only equ- the only risk premia or risk premium, singular, for asset allocators to harvest over years to come is going to be the equity risk premium.

James Aitken:

There’s this tension, isn’t there? Between, gosh, some things look extraordinarily rich versus the reality of asset allocators worldwide, just looking for adequate returns over the next 10 or 15 years. And to put it in simple mathematical terms, if we assume that the equity risk premium in the United States, say the S&P 500, is 4%. And I’m a sovereign wealth fund or an endowment trying to take a 15 or 20 year view. Then if I take 4%, the equity risk premium is roughly right. Then over the next 15 to 20 years, I could probably expect to generate 60 to 80% on the S&P 500, right? It’s that kind of dilemma.

James Aitken:

And they all know that they have to unlearn everything they thought they knew about asset allocation. And that’s where this is so dangerous. So, you can see it in so many, in sectors and spots that it’s like, “Oh, gosh, I know I shouldn’t be doing this, but I have to.”

James Aitken:

And, look, I look at so many things on the Bloomberg and I look at so many valuations. You could go down the list of things that make no sense, and we can draw all the analogies with 1999 and the early part of 2000, which we probably should. But, there’s one key rider. In the start of 2000, January, 2000, 10-year tips in the United States were about 410 basis points. And now there are, let’s say for simplicity minus 100, gosh.

James Aitken:

You know, there’s the conundrum, because if we think things are crazy today, and a lot of things are driven by liquidity, however, we want to calibrate that. Then you’ve got this backstory, which is discount rates, whether it be nominal or real discount rates, force people to play. And who knows how silly this may get?

Bill Fleckenstein:

Well, it seems to me, I mean, we have a unique moment in financial history. I don’t mean this second or this day, but we, I think it’s not debatable, really, that we’ve had an equity bubble of some magnitude in the States. Because you can only get multi-billion dollar companies or a hundred billion dollar companies that are some gigantic multiple of revenues or a $50 billion company that doubles on a day. All of these things, they only happen in manias and they happen at the end of wild periods.

Bill Fleckenstein:

What’s particularly unique about now, and this is the layman’s version of what you just said, in my opinion, is that we have a period where the central banks have completely abdicated any, any belief that excesses are possible and excesses may be dangerous. The only outcome that they seem to want to solve for is employment and really inflation as an extension of that because they’ve tied the two together. And they think that inflation somehow signifies GDP growth, as ass-backwards as that thought is.

Bill Fleckenstein:

So, we’re at a moment in time where it doesn’t really matter how out of control financial markets become, they’re not going to do anything.

Bill Fleckenstein:

And, so I think the question that I have as someone who spent a lot of time thinking about, reading about and fighting bubbles, or trying to capture the other side of bubbles, how does one navigate this period? I know enough to know you can’t fight it.

Bill Fleckenstein:

And I know a lot of people are just going to join in because the stuff I just said, doesn’t matter to them. But I don’t see how any person that’s allocating real capital that matters to them. Can’t, or doesn’t somehow have to weigh these two things, we know what the fiscal and monetary policy plans are, and the response is going to be in the areas. They’re going to be on more, not less.

Bill Fleckenstein:

But then you’ve got this epic risk that’s developing. I just don’t know how to balance those, when I think about it for myself.

James Aitken:

Let’s think about it in accounting terms. Market to market, right? Now, if the three of us, you know where I’m going with this already, but imagine the three of us happily have a billion dollars to allocate over the next 10 years. And we conclude that nearly everything is very richly valued, to put it mildly.

James Aitken:

But we have no redemption risk. And we meet as an investment committee with our bosses or colleagues once a quarter or twice a year. So, I think, “Gosh, everything’s fully valued, but I don’t want to explain why I’ve taken a bit of a chinning over the next, between now and the next meeting.” So what do I do? Well, obviously I put as much money as I can in a non mark-to-market vehicle. And what would that be? Private equity.

James Aitken:

And if I wanted to be slightly facetious, I would say that the big problem with subprime in ‘07 and ‘08…

Bill Fleckenstein:

Yeah. I know where you’re going.

James Aitken:

Right?

Bill Fleckenstein:

Yeah.

James Aitken:

Too little.

Bill Fleckenstein:

Go ahead and say it for the other people who don’t know what you’re going to say.

James Aitken:

Yeah, too little of it was held in non mark-to-market.

Grant Williams:

Right.

Bill Fleckenstein:

Exactly.

Bill Fleckenstein:

We had three levels of accounting. We needed a fourth.

James Aitken:

That’s right.

Bill Fleckenstein:

Never mark-to-market.

James Aitken:

I mean, let’s face it, you can put whatever garbage you like in a non mark-to-market vehicle, as long as you’ve got no redemption risk. Right?

James Aitken:

But look, this is not to disparage all the very clever people in private equity. But,, obviously they are financial engineers power excellence. Their cost of borrowing has never been lower and may go lower yet. So if I’m an asset allocator, and I say, “Gosh, 25% plus of the SMP 500 is the FAANGs or whatever. Gee whiz.” What happens is there’s anti-trust or… Any wobble wobble there, well, the whole market falls down. Gosh, that’s embarrassing. Oh, I know. I’ll just get David Rubenstein on speed dial.

James Aitken:

That’s part of the incentive here, is how can I participate or continue to participate in these booming markets without embarrassing myself? Right?

James Aitken:

So, it’s no wonder that people are taking what we think of as a liquid bet, but really they’re, I think the incentive is non mark-to-market bets, and hopefully we can ride through any setbacks.

Grant Williams:

But I mean, we’re seeing this with the SPAC frenzy. We’re seeing this exact thing.

James Aitken:

Oh, gosh, yes.

Grant Williams:

That’s this taken to absolute extremes. We’re back to blank check companies And again, Bill, you chronicled this by the day when it was happening before in a slightly different form. So, for you, this must be ringing so many bells in your head about what happened 20 years ago.

Bill Fleckenstein:

Absolutely. I mean, if I was intent or if I was still running a short fund, God forbid.

Bill Fleckenstein:

On one hand, I’d say, God, every single thing that you need to see about excesses, and then some, is occurring. That’s been happening for a while. But, as a practitioner, I went and I went down my checklist,, I’d say, “What’s the Fed doing? I can’t. Nope, Nope.” My checklist would come back. You can’t fight. You can’t go near this at all. And knowing what their intentions are. So, part of me… And the other part of it also is adding in the passive factor because you know, that also distorts it and makes this hard that… We can’t look at the market as we used to in a collection of people and the crowd would get to a place and they would tip over and the authorities weren’t going to ride to the rescue in an instant.

Bill Fleckenstein:

So, it was worthwhile to, if you saw a bubble develop to try to think about catching the other side. Now, half the participants, as James noted, only care about quantity. And, so you can’t rattle them. You have to indirectly rattle them by laying off the people, the corporations. So, the corporations don’t put the money in, so, that’s hard to route.

Bill Fleckenstein:

So, then the other half that are doing what they’re doing, keep getting rewarded. So, all I know is it would have to get even crazier, but then when you factor in the fact that central banks are not going to do anything negative, I think we’re in the midst of creating the biggest bubble in the history of the world. And then some. But I have no idea when it ends or how it might end.

James Aitken:

Let’s break that down into a few components because… Yeah, I mean, who knows how far this could go yet, and just keep that one thing in mind. 10 year TIPS, first quarter of 2000, 400 plus basis points. Positive, shocking. Now, minus a hundred. So, what’s every asset allocator on the planet going to have to do to keep up? They’re going to have to keep taking risks in one way or another. That’s the first point. Second point is just to tease out a little bit more about central banks and the Fed. And one thing that’s broadly, not always but broadly served me well in understanding central banks is imagining what I would do if I were them with their legally binding mandates. And we won’t get into all the moving parts of that, but think of it this way. For 20 plus years, central banks have not been able to meet their inflation mandates.

James Aitken:

And yes, there’s self-imposed inflation mandates in some cases, but in other parts of the world, they’re actually legally-binding mandates and along comes 2020. And you think to yourself, “Oh gosh, you’re a central banker. you think, “Oh man, this is just carnage. We’ve got job losses. We’ve got defaults, we’ve got everything. We’re definitely going to have an undershoot of inflation. What do we do?”

James Aitken:

And the conclusion is not much different than it’s been for the past decade plus. And that is to say, if you’re in a services dominated world, where there appears to be excess, perpetual supply or new supply, and it’s cheap, and we’re tilting away from manufacturing, at least in the West, which everyone knows, then the only way you can hope to meet your inflation target is via financial markets and keeping financial conditions as loose as possible for as long as possible.

James Aitken:

So, yes, it’s unfortunate perhaps, but from their perspective, what else can they do other than to arrest any tightening for any reason in financial conditions? So, what I see all these central bankers in particular doing is like, look, we have no choice. We got to do this. And we got to keep it easy. There’s occasional lip service to financial stability. Frankly, I can’t remember the last time I read any IMF financial stability report or Bank of England or Fed. Frankly, it doesn’t matter. It’s just a placeholder in case something blows up and they can say, “Oh, yeah. Remember that thing we wrote five years ago? Yeah. Great. Thanks fellas.” You know, like leverage loans or CLOs.

James Aitken:

No one’s really trying to ratchet that down and look, as long as financial conditions are the be-all and end-all of how central banks think about these matters in terms of getting them closer to the inflation objectives, then you know, what are we going to do? And I think, Bill, you’re right. It is tempting to draw all those 1999 and first quarter of 2000 analogies. But, what’s so different about this cycle is that if inflation does show up for any period of time, every central bank in the world is going to be throwing a party and cheering as opposed to trying to stop it. And it’s extraordinary.

Bill Fleckenstein:

Well, let’s get to that ‘if’ part.

Grant Williams:

Can we just hold on for inflation one second?

Bill Fleckenstein:

Okay.

Grant Williams:

Because there’s just something I want to just try and figure.

James Aitken:

Okay.

Grant Williams:

When I think of the points you made there, James, about being an allocator is so true. Right? And you normally, you’ll sit there with, if you think of traffic lights, you’ll think of conditions to put this money to work. You’re going to be green. Everything’s great. Let’s go, we’ve got tailwinds everywhere. This is a great time to put money to work. Then you’ve got caution. We could be at the end of the cycle, amber light flashing. And then you’ve got the downside of the cycle, which for those of you old enough to remember, it used to happen. But, what we’ve just seen obviously is the single greatest economic catastrophe in our lifetime, certainly. And those of our parents and grandparents, I mean, how far back you’d have to go.

Grant Williams:

So, the biggest red light that has flashed in front of traffic for multiple generations has flashed and markets have gone screaming higher.

Grant Williams:

And so it feels as though you’ve basically what you’ve done is you’ve taken away… It’s now safe to drive through red lights. It’s now safe to put your foot down when you come to a red light because it’s going to be okay, no matter what happens, this is going to be saved. And so I’m just interested when we’re in a situation like that, and those are the prevailing conditions, I totally get the… Let’s throw everything at private equity, let’s throw everything at the equity market. I totally get it. But at the same time, I find it interesting that there’s so much talk. And you brought up the IMF. We’ve talked before about. The WEF, all this talk about the great reset.

Grant Williams:

And this is clearly a very well thought out, orchestrated attempt to put this idea of a great reset as far out into the financial and physical community as possible. Hinting that we realized there’s something needs to be done, but generally speaking you can’t have those things without a crisis, but people don’t, we don’t need a reset. We talk about the stock markets all time high, the economy is bouncing back. We’ve got a vaccine. So, how do you hold those two opposing thoughts together?

James Aitken:

How did sorry to be clear? What do you mean? Who’s imposing a great reset?

Grant Williams:

Just talking have put WEF foot papers on it. The IMF have been talking about a great reset. Lagarde has been talking about the reset, they’re choosing their words carefully. There’s obviously discussions have been had about, we are –

Grant Williams:

They’re choosing their words carefully. Obviously discussions have been had about, we are going to need at some point to reset this whole thing because this is unsustainable.

James Aitken:

All right. Well, the way I’d approach a lot of that commentary is great reset in that fiscal policy at long last has become available in scale and happily monetary policy is no longer the only game in town.

James Aitken:

And part of the problem let’s reflect on the past 12 years, a really big part of the problem coming out of ‘08 and ‘09 was frankly that fiscal policy was turned off way too soon. And monetary policy became the only game in town and then was forced to do things that monetary policy was never, ever, supposed to do. But again, Grant, thinking from the perspective of someone voting on monetary policy at a central bank, what are they going to do? They can’t throw their hands up and say, “Look, we tried our best it just didn’t work out. Thanks for coming,” that’s just never going to happen.

James Aitken:

So when these people talk about reset, I think they’re talking about the required fiscal policy tax changes to come and other matters that have been talked about for a long time, but have been postponed. But there’s a flip side to the reset as well, to be clear, it’s not all bad news and far from it. The fact that Europe has in some fashion arrived at a point of joint and several liability. I mean to a Euro-skeptic like me, it doesn’t matter. It’s here, it’s real and that cuts off a lot of the left tail of the Euro-denominated asset distribution. So I see the reset perhaps too narrowly when they all go on and on about reset, I think a bit of it as, thank goodness fiscal policy’s now being deployed. Thank goodness that certain jurisdictions that can afford to borrow are actually getting into it in a big way.

James Aitken:

And thank goodness that they’re committing to sustain fiscal policy until labor market slack has been eliminated, or not fully eliminated, but is on the road to being eliminated. And interest on that… Look as much as we all understand the challenges for risk assets, if central banks, for any reason…. I mean, can you imagine, just to pause there, imagine the day we’ve had two years of J Powell or Lael Brainard or whoever ends up running the fed at the end of next year, “Look, we are not even thinking about thinking about raising rates.” And then you have a press conference and he goes, “You know how we, well, we, gosh, golly, it’s not 2023. It’s January ‘22. Oops.” Yeah, now by the way, I’m not sure that happens, but so we all know the challenges of navigating the handoff from very, very low central bank rates to something just tiny positive.

Bill Fleckenstein:

I was going to get to that but-

James Aitken:

Yeah, we’ll come to that. But I think what’s encouraging is that the fiscal policy is probably going to be around for a long time to come. And that’s the reset. And I think it’s welcome because monetary policy was getting way, way too deep into the distributional game. And that should always, and only be the jurisdiction if you will, of fiscal policy.

Bill Fleckenstein:

This is so bizarre because if we think about this sort of thing and carry it to any reasonable conclusion, like if we extrapolate this for a year or two as you were doing, the size of the hangover is incomprehensible. And therefore then when you think about it that way, well, then they can’t stop. Of course that’s where we’ve been since the central bankers became such activists and if we look at it through that prism, you can see how this run and never… We’re on a treadmill we cannot get off of. And yet some point we’re going to get off of it, or we’re more likely going to be forced off of it. And it seems to me that I don’t see how the bond markets of the world can put up with this indefinitely.

Bill Fleckenstein:

I know the arguments for why the bunds can never go down and why JGBs can never decline it. But the fact of the matter is the bond market is going to have an accident. And when they try to stop it from expressing its doubt about the ability of all these things to happen with no negative consequences like inflation, they’ll come in for yield curve control. So we’re going to get a running look at the end of them being able to get away with this with no markets objecting, it seems to me. It’s all easy to talk about the fun and games that we can all pursue, but we have to keep some part of our brain occupied about what are going to be the warning signals when it’s getting late in the day for this whole scheme.

James Aitken:

It’s tricky because so few of the warning signals that might’ve served us well, even 15 years ago, just don’t work or not allowed to work, I think would be a better description.

Grant Williams:

Yeah, that’s exactly right.

James Aitken:

We know that, we know that don’t we? And look at the highest level, the gain for 25 plus years, there’s been how to avoid a liquidation event in risk assets. That’s been the backstory because it’s that [crosstalk 00:40:51].

James Aitken:

But let’s again break this down into what might trip some of this up. Look, if you’re a central bank, we’ll just stick with the fed because I think that’s the easiest one to digest. If you’re a central bank telling the world over and over that you think the only route to higher realized inflation is via maximum employment, then quite frankly, you, that central bank with that narrative have very, very little tolerance for any sustained tightening in financial conditions.

James Aitken:

And that is, of course the fed. Now that doesn’t mean that defending the S&P at some level, but they’re watching all of this because if we stall here and let’s face it, with rolling lockdowns now coming, we’re going to have a bit of an easing in growth over the next couple of months or so, it’s going to soften. But we know that, don’t we, right? If the Fed’s ability to meet their maximum employment objective through which they hope to generate higher average inflation is in any way constrained or restrained by tighter financial conditions, the Fed will act, okay. It’s as simple as that. Now here’s the next part of the problem. When we think about why rates are going up, you’d have to conclude that the only reason that long-term bond yields are going up is because we have made far greater progress on eliminating what is obviously enormous labor market slack, obviously. I mean, industries have been devastated, households devastated.

James Aitken:

And if we’re making far greater progress on labor market slack over the next, say six to 12 months, and that in turn means that long-term bond yields are higher because let’s face it, you’re only going to generate a big reduction in labor market slack, getting people back to work, if either wages are rising a lot higher than people anticipate or the economy is doing a hell of a lot better than everyone ever imagined, which frankly, are two high-class problems to have. So to be clear, if we’re imagining an environment where longer term yields are higher, we’re imagining an environment where global growth is coming in white hot, and I think the second and third quarters of next year could be really great, but you’re also imagining simultaneously a world in which we’re making much more rapid progress towards eliminating labor market slack than anyone could ever imagine.

James Aitken:

And again, we could argue that’d be a high-class problem to have. Now as unlikely as those simultaneous developments may seem right now, when here in the Northwest atmosphere we’re thinking about all these lockdowns and more devastation and uncertainty, it’s just, when’s it going to end? Well, not too far. We can talk about vaccines in a sec, but really if rates do go up at some point, either because long-term bond yields are going up and let’s face it, long-term bond yields will be going up because the fed’s happy with them. And the fed will only be happy with long-term bond yields going up, if the economy is evolving much quicker than they imagined, and the vaccine’s been distributed and people are getting out there and getting after it again. So of course in that scenario, some of these companies we touched on earlier or in passing, these very high-flying, high ROIC return on invested capital companies, trading at heroic multiples that have no chance of making their year on year comps. As we move through the summer of 2021, they’re going to get smacked.

James Aitken:

And that sounds like quite a few tech companies, but we don’t know yet.

James Aitken:

So to come at the question Bill, about rates as to what can tip this up, and you can tell I’m coming first from the economic perspective, if we’ve got pressure on rates, because things are improving far more rapidly than we dreamed, I’d say that’s a high-class problem for the world to have. And I think investors will be able to rotate. But if on the other hand, rates are moving up because there’s indigestion in bond markets, then that’s a much bigger problem. And look, I don’t see indigestion in bond markets yet. By golly, there’s been a lot of long-term bonds sold in the United States over the past couple of months and yet as best one can tell, they’ve been digested, right?

James Aitken:

One way or another they’ve been digested. Now the irony might be that part of the reason all this duration has been digested or absorbed by investors, and yes of course the fed, is because growth again is looking a little bit uncertain over the next two months. Inflation remains very low, we did see a bit of a pickup through the autumn, but inflation is coming off again and people are feeling a little less confident in their vaccine reflation view. So I guess what I’m saying, is we’re going to get, I think everyone knows this, we are going to get the inevitable inflation scare as we move into the second quarter of 2021. Due to base effects, core and headline inflation will pick up and maybe there’s some pressure on rates, but unless we simultaneously… Meaning rates higher… But unless we simultaneously believe that we’re making far more rapid progress on eliminating labor market slack and we are hurtling towards the Fed’s objective of maximum unemployment, I don’t know when they see it, it’s difficult now to see the inevitable inflation scare into the second quarter of next year, again, due to base effects.

James Aitken:

as anything other than a bit of a speed bump in terms of what’s happening in terms of a speed bump for rights and the long end of the curve? At least that’s my best guess now, but just to add one other thing, again, try to make this as practical as possible because we all know there’s a lot of macro pontification around it these days, but we need to think about what we actually do with it all. And Grant, the simplest indicator for me from June onwards, and it’s been one of my favourite crosschecks for many, many years, it’s just simply the CRB Raw Industrials Index. And for whatever reason, at the end of June this year, it just turned around like a hockey stick and it’s never stopped.

James Aitken:

And for the benefit of listeners, the CRB Raw Industrials Index is an index of non-financialised commodities. It’s a function of pure demand and supply for the most basic of basic commodities. Well, that’s the way I think about it. But in the past week, it’s ripped again. So it’s telling me that the reflationary tailwinds remain very powerful, at least if I look at the world of basic commodities and then commodities more general, which we might come to. So I take away that the reflationary trends remain intact, even though we’ve got some headline uncertainty and we don’t know yet. We don’t know yet if these powerful reflationary tailwinds will turn into inflationary headwinds, but that’s one for the second quarter of next year.

Bill Fleckenstein:

But let me ask you this, when we chatted last spring, your viewpoint was that we’d probably start to see some indications of inflation by now-ish and that we’d probably see it in the early part of next year. It sounds like you’ve changed your viewpoint on that slightly in that you’re talking about a potential inflation scare. So it sounds like you’ve downgraded your outlook, so to speak while you’ve just given some of the ingredients for causing it to happen when you look at these raw materials and what that may be indicating. So you want to sort that out for us please?

James Aitken:

Yeah. I thought we were going to run into some pretty severe supply side constraints in labor markets as key sectors came back to work, and it just hasn’t quite happened. I would have thought by now that for all the uncertainty, you would have seen a little bit more tightness emerging in key sectors, it hasn’t happened. Obviously there’s headlines you read about in key industries and trucking and everything else, and people getting into cargo and logistics, but that’s a given as people race to restock and obviously get the vaccines out the door. So those supply constraints in labor markets didn’t pan out as I thought and certainly not in the time frame, I thought, which means that unsurprisingly there’s a lot more slack in labor markets to be eliminated. But the broad reflationary trends remained intact. Maybe we call them reflation or recovery, I’m not sure.

James Aitken:

I’m still watching all these different labor markets, just keeping an eye on them but we had a little bit of a blip and now we’re sort of coming off the boil again. And look where it comes down to is this, maybe I over-thought it. Maybe that’s another mistake for 2020 is again, overthinking. If you put millions and millions and millions of people out of work, the idea that you will eliminate labor market slack in six months, let alone 12 months is probably very wishful thinking. And we’re not seeing the tightness really come back yet. And you can see the fed in particular is troubled by that because the lack of pickup in wages or the absence of sustained wage inflation tells the fed in no uncertain terms that they’ve got more work to do. By the way we haven’t mentioned it, but this week’s FOMC meeting could be really interesting in terms of operational guidance from the fed tying their asset purchases to specific economic outcomes.

Bill Fleckenstein:

Do you want to give an example of that for people that don’t do this every day in detail?

James Aitken:

Oh sure. Bill, it would be as simple as like, we will continue to buy X billion per month unless, and until the unemployment rate is X. Now, that’s a very tricky world to be in because there may not be any robust models that tell you that buying $120 billion of stuff every month for 12 or 24 months actually reduces the unemployment rate and ensure of serve to keep financial conditions easy, but there’s no really robust links.

James Aitken:

Yeah. And then within that, another striking feature of the extraordinary amount of treasuries that the feds bought this year. I mean, if you think about QE2, gosh, when was that eight years ago, thereabouts seven or eight years ago. The average duration of the treasuries that the fed purchased was 12 years. So is it any wonder that that’s served to ease financial conditions? Because it was a little skewed further out the curve. In 2020, the average duration of the treasuries bought by the fed is about six years, which is quite short.

James Aitken:

And I just wonder whether… To be clear, it’s very hard thing for the FOMC to articulate. But I just wonder if they’re trying to figure out… Well, they are trying to figure out how to link asset purchases to outcomes and related to which even if you can’t find a way to link asset purchases to outcomes, economic outcomes, not forecasts, but actual outcomes. Well, in the first instance, that means you are entirely reactive as the economic data comes in. But the second point is that signalling that they intend to extend the duration of their asset treasury purchases somewhat from six years to something longer might serve to buy them a bit more time. Of course, the counter argument is who cares, the 10 year treasury as we speak is 89 basis points, who cares. The market’s doing the Fed’s job for it by holding long-term interest rates down.

James Aitken:

But look, I think we’ve got a potential tweak coming up this week to the Fed’s operational guidance and we all need to pay attention to that, because let’s face it. We talk and sometimes joke about FOMO, but there’s only 17 days to go in 2020, for all sorts of investors and they just can’t wait to get to that 31st of December NAV cutoff and just put this awful behind them. But it does mean over the next two weeks, if people are a little bit light on risk and the fed comes in and says, “Hey, you know what, we’re going to give this more cowbell.” Then you’ll see people just scrambling for everything.

Bill Fleckenstein:

What do you think the probabilities of us getting that sort of statement or operational guidance, however you want to call it from them?

James Aitken:

Well, the thing they’ve been telegraphing as much for some time, even Bernanke and Yellen said during the summer that the Fed’s new operating framework was incomplete because they haven’t tied asset purchases to outcomes. And again, it’s very hard to do. There’s two ways of thinking about it, firstly, what’s the probable… Well, actually there’s two parts to this. So it’s not just, Bill, what’s the probability that the FOMC to be precise, agrees to tweak its guidance this week. It’s also, second, do markets care? I mean, would it be a surprise? Would it be a dovish surprise, given? So the first part of the question is, I think it’s 50/50, maybe. It’s not a slam dunk. I think there’s some room for them to at least talk about it in the press conference and so forth. And then they’ve been hinting for a long time that they were grappling with the topic of asset purchases and outcomes.

James Aitken:

They’ve been talking about that for many months. So I don’t think it would necessarily surprise too many rates traders or macro types if the fed did decide to give us more information on these asset purchases. So maybe not a surprise to fed watchers, maybe not a surprise to macro types, but at a time when people are… Believe it or not, some of the worst of the speculative… And that’s a bit unjust. Some of the obvious speculative excesses have started to come out of the Qs and the NASDAQ, you look at open interest in calls. It’s come way down again. Maybe it’s all the Robinhood dudes and dudettes booking profits ahead of year end. I don’t know, is that a new fact that we need to consider, but it’s really interesting. Everyone’s an expert on why calls have gone parabolic. We’ll they’ve actually come off when you look at it against market cap and everything else. So I’m just wondering if there’s one last surprise in this crazy year for the stock market in particular. We just have a crazy blowout over the next 17 days because [crosstalk 00:57:32].

Bill Fleckenstein:

Why not?

Grant Williams:

So if you think about it from the fed’s point of view, tying asset purchases to the unemployment rate, like you said Frydenberg’s done in Australia. It’s actually a very smart thing to do because what you’re basically doing is, as we all know, is you are giving the green light to Wall Street that, “Hey, we’re there,” but you’re couching it in terms of say, “Hey, we’ve got Main Street’s back here. And until you guys all got jobs again, we’re going to be in here fighting for you.” So as a strategy, you’d almost be crazy not to adopt that policy right now.

James Aitken:

What’s the risk of overdoing it is the executive summary, right? When you’ve got the greatest economic calamity in decades, you’ve got whole industries laid waste. What is the risk of overdoing monetary and fiscal policy right now? The answer is very low. So if you approach all of this from a regret minimization perspective, it all leads to one road or should I say one paddock, which is more cowbell. And there’s another side to this. And we all for the right reasons are thinking about the left tail of various distributions. Okay, we’ve had a V-shape recovery and there’s uncertainly, but by golly, we’re all thinking what can go wrong or what might go wrong? Well, there’s another tail, there’s always two tails to the distribution. What if this all works? What if it works?

James Aitken:

And I’m starting to wonder about that, that we actually close these output gaps, which often get revised away anyway years later. But what if we actually are able as a result of this forceful policy to eliminate labor market slack far quicker than anyone could have imagined. And then the bonus, and this is the greatest, greatest, greatest thing in 2020, is the speed of the arrival and delivery of the vaccines. It is the best stimulus you could hope for, because if you look at previous pandemics or viruses or whatever, getting a vaccine can take years. And we got a vaccine within months, which is phenomenal. And as more and more people take them and they get rolled out in early 2021, my kids cheekily joked that given my advancing age, I’m now probably first or second in line, which I think is a bit unfair. But I’m sure they’ll appreciate the homeschooling for the rest of the debts. But we’ve got three forms of stimulus. We’ve got the monetary, we’ve got the fiscal and we’ve got the vaccine.

Bill Fleckenstein:

And everything would be groovy if it wasn’t from the valuations, they’re so insane and the behaviour is so insane. Now, again, none of that matters right now. I know that, but it’s like, if you could drink as much as you want and never got hung over, I mean, that’s basically what we’re doing in the financial markets. We can take whatever drugs we want, we can drink as much as we want and all we get is upside, no downside. And there’s no point in worrying about it this minute because it can’t really come into play. But I mean, it’s there. Again, I don’t know when we have to think about it, but I can’t talk about this like it’s all unvarnishedly, great because these immense excesses have to matter at some point.

Bill Fleckenstein:

But I also know that they’re not going to matter in any reasonable, measurable amount of time right now.

James Aitken:

Let’s think about that because maybe we should invert it. The first point, which is these heroic valuations which may get more heroic.

Bill Fleckenstein:

Exactly.

James Aitken:

We don’t know, but as Paul Jones put it in that marvellous video of the trader of October 1987, you never ever short an upward sloping parabola.

James Aitken:

But boy, if it ever breaks but we’re on the parabola.

James Aitken:

We all know that. So we can try to be the cleverest guys in town and pick the moment when all of this exhausts itself, which is a very tricky thing to do.

Bill Fleckenstein:

Let me say one thing because I’d like you to factor this in your answer. I’m not really trying to do that. I’m not thinking about it like, “Oh gee, I want to catch this.” I’m thinking about it more like, because I feel that I know this is going to go on for quite a while still, I keep thinking about the immenseness of what might happen down and how to set up a mental framework for it. Not, gee let’s catch it. Gee, let’s not get caught by it. You know what I mean? It’s a different mindset.

James Aitken:

No, I’d roger that and I was just trying to walk through it for the benefit of listeners to know where we’re coming from. But the point about inverting this, we can play that dangerous game of like, when does the parabola…? Or we can just say, you know what? We’ve got vaccines faster than anyone imagined. We have this tremendous stimulus and yet companies that you would think would benefit from the arrival and delivery of vaccines have barely rerated. And these are companies and yeah, there are some tricky ones because it could be the better airlines. And incredibly, there are some very well run ones.

James Aitken:

It could be airlines that early on raise capital, but didn’t raise capital at all. It could be airlines that actually have some of the toughest management in the world who have used 2020 to embark on restructuring that was long overdue and actually puts them in a better shape for not just next year but the next five or 10 in terms of market share and profit margin and everything else. But we can go down the list of companies and think, it’s very odd that these companies had a bit of a blip and now they’re just going sideways and they’re leaking again. We’ve all discussed this and thought about the discussion about value is back in this great rotation, I think is nonsense. Right? People get caught up in labels. Value is not the value factor. And the three of us today can buy unbelievable global brands for what I think are unbelievable prices. Unbelievable prices

James Aitken:

So that to me is the flip side of protecting oneself against something that goes bump in the night. And we don’t know what it is. We never know, except in hindsight why a bubble burst. We can point to all the initial conditions and we know them back to front because as our friend, Jim wonderfully puts it, “In science knowledge is cumulative, in finance knowledge is cyclical.” Everyone forgets all the dumb stuff people do on margin and everything else and then the tide goes out and everyone’s exposed. So to me, Bill, if I was to say, right, I’m a little bit edgy and nervous about valuations as some of those high flying stocks. Well, the way I’d protect myself and there’s many ways, but if I’m thinking, “Okay, I need to protect myself in equities.” I’ll look at some of those great global brands, which have restructured, which have turned out financing, which are well-run and well positioned to thrive in any environment, or may have actually increased market share, which is good for the bottom line.

James Aitken:

And that to me has dominated a lot of my thinking over the past five or six months, as you know, and also helping clients think about some of these things. And again, for the benefit of listeners, people say, “Well, what’s all this got to do with macro?” Well, over the past three decades, macro has been narrowly defined as, FX rates, policy equity indices. But if you go back to the early 70s, when macro was really kicking off, it’s interesting to see how much of the profits generated by the Steinhardts, the Kovners, the Soroses of course. There was actually macro views expressed in equities and related to which of course, as a sidebar. If we take central banks at face value, well, there’s not going to be much happening in short term interest rates. There’s not going to be much happening in curves really, unless they make a mistake, which means that people are going to have to take risk in other parts of the world and other asset classes and by definition, more and more macro risks will, out of necessity, have to be expressed in equities.

James Aitken:

But to be clear, look, you’re right. None of us, none of our friends is trying to predict where it all goes pop. But I’d say that the sure fire way to protect oneself against that is to understand that there are unbelievable companies out there available at unbelievable prices. They just have barely rerated. And yet you know that if you imagine the world six to nine months out, the vaccine rollout would have been enormous. It would have been worldwide. The confidence would have picked up after what will be obviously a difficult transition growth wise and economy wise, especially in the Northwest hemisphere as we move into 2021. But we’re heading in the right direction. So I find it very interesting right now to look over airlines and certain hospitality – things have to be very selective. So it’s not about a factor, it’s purely about specific companies that have strong positions. That’s been the case since September. And the last thing which we may get into as well is that, I think one of the outstanding reflation trades here, which will get me into all sorts of trouble with the ESG evangelists is oil.

Grant Williams:

Right? Yeah. They used to call this value investing, what you just described, I think.

Bill Fleckenstein:

I was just going to say that you’re making sort of a back door recommendation. I mean, you’re not saying buy value as a brand, so to speak. You’re saying if I have valuation on my side in a business I think that is particularly well situated, whatever that may be, then I’m more likely to be able to write out the unforeseen curve balls.

James Aitken:

Correct.

Bill Fleckenstein:

What I’m going to give up for that is day-to-day pats on the back telling me that I’m doing the right thing, as my stock picks, do well for two weeks, do crappy for three weeks or however it plays out. You’re willing to take a little daily mark to market slippage, shall we say, to be able to sleep at night.

James Aitken:

Right. That’s it. I mean, look at the past week. I must be missing something because I thought it’s been known for two years, that Iger at Disney was coming after Netflix. He’s been talking about for two years, and you think, “Gee wiz. What a businessman. What a business.” If they put their catalog out there and start streaming it, then good luck Netflix. And you saw her on Friday, Disney, what is that? $300 billion market cap? You’ll be able to correct me. And it’s up 14%.

James Aitken:

And it’s up 14%. I’m like, my gosh, is that what a Disney+ announcement’s worth? And fair play to Iger, because he announced it like an Apple announcement. You know, they all do these promotional videos, the big theatre. It’s very, very savvy how they’re trying to pitch themselves. You know, when I think about value and compelling value, and moats I … look, I’m not going to provide any trading advice on Disney in the high hundred dollar range to anyone listening in. But as a metaphor for what’s happening, you’ve got Netflix trading at heroic multiples, so you’ve got Disney, the juggernaut, coming. What do you want to do? Do you want to say, “Oh, well Netflix looks a little odd. Netflix is no longer overbought. I think I’ll buy some at 500”. Well, not if Disney is going to come and eat their lunch you’re not, right. It’s just simple examples like that.

James Aitken:

But you’re right. It’s not to get caught up in labels it’s to think about businesses trading at reasonable valuations, better yet with a margin of safety, that are going to be around for decades to come. And I’ll give you another one. How would you like to invest with Sam Zell at book value?

James Aitken:

It’s out there right now and people like. “Oh, I don’t care. It’s commercial property. No, no. You are co-investing with Sam Zell at book value and it’s got $25 of cash on the balance sheet and it’s trading at $26. That seems all right to me because I’m not out there trying to keep up with Robinhood. I’m not out there trying to keep up with Bitcoin. I don’t expect to make 40% plus year in year out. That’s just not realistic. But if I can offset some of my exposure to this high-flying stuff, and now I can put my capital with someone who, shockingly like Sam, has seen several cycles. How do I feel about that? Well, I can sleep at night.

Grant Williams:

Right. Yeah. Yeah, it’s so true, James. It’s so true.

Bill Fleckenstein:

And I know you’ve got other ones, examples that you like, and I would make the same case, not to beat a dead horse, but you can find the same thing in the mining sector where they’ve all turned their businesses around and now they’re selling an eight, nine, 10 times earnings paying dividend. And at the same time, you’ve got some insurance built in on the negative consequences of these policies.

James Aitken:

Absolutely.

Bill Fleckenstein:

But it seems to me for all the rifle shooters out there, which is what we’re talking about, rifle shooting, picking things.

James Aitken:

We are, yeah.

Bill Fleckenstein:

For that to really feel good, so to speak, we need some sort of change in the way the market’s behaving right now because value gets discarded and active managers get fired, and so there is a performance headwind we’re dealing with on a daily basis. People need to accept that, I think. Going in, right?

James Aitken:

No, that’s dead right. And I think what we’re sort of kicking around is not growth. It’s not value. It’s just quality and-

Grant Williams:

Common sense. It’s common sense.

James Aitken:

Quality. Common sense, quality businesses that the markets may have overlooked in their rush to grab whatever’s on Robinhood

James Aitken:

On fire today. You know, it’s like, “Oh. Well, I’m not going to … I’m going to overlook all those brilliant businesses that have seen many cycles, tight ships, because I don’t want to miss out on the next momentum darling. No, that’s fine. That’s that’s bull market 101, but the longer it goes on the more you think, “Well, I wouldn’t mind some of that other stuff”, and let’s face it, if markets keep levitate … well, actually levitating is a bit subjective. Let’s assume markets keep going up. Well, some of these things we’ve been kicking around will do fine. They’re not going to be up 50 to 60 to 70%, but they’ll still be doing fine.

Grant Williams:

Yeah. So true. James, we’ve had this big debate and it’s a debate that after we first spoke to you, we had the likes of Lacy Hunt and Russell Napier pipe in, and we’ve had this deflation/inflation debate going on. But what’s interesting to me is you’re talking about reflation and how reflation is a tailwind, it’s a positive. And I absolutely agree with that, and that’s something that is our bad. We should have brought that into the debate sooner. But since you brought it in, let’s talk a little bit about the nuance between reflation and inflation and when, and what you look for when good reflation turns bad, if you like, and becomes a problem.

James Aitken:

Yeah. Well, we don’t know yet is the very frank answer. We don’t know yet. But put it this way, at a minimum, at a minimum, to keep with the US example, it would entail core and headline inflation being comfortably above two and a quarter, perhaps two and a half percent for, I’d say, the best part of the year.

James Aitken:

For the fed to even go, “Oops a daisy. We might’ve overcooked this”. And so it’s a question of calibration. Now, if we miraculously eliminate labor market slack, and I keep coming back to that because that’s obviously the key, far quicker than anyone imagines then the odds go up a bit that in 2021 you see core and headline PCE in the United States – not just in the second quarter of next year but well into the third quarter, perhaps longer – somewhere in above 2%. But it would take something extraordinary in terms of labor market supply, and private sector employees raising wages, perhaps under political pressure, who knows, we shall see, to generate what I would consider out of the box realized inflation.

James Aitken:

And the other thing to keep in mind is that we’ve had not just 12 years but best part of 25 years of central bank stimulus. And we’ve had inflation targets, or rough inflation targets for all that period. And we’ve rarely been able to generate higher realized inflation. Rarely. Not often. And even then something always happens and it falls down.

James Aitken:

So to be clear, you should be thinking that due to base effects, core and headline inflation all around the world should pick up in the second quarter next year. It should pick up. But unless you have a very, very strong feeling about labor market slack and private sector wages in particular, then I think it’s a little bit early to call for sustained higher realized inflation. It’s a little bit early.

James Aitken:

And then of course, hand in hand, unfortunately, is even if inflation does turn out to be persistent at a higher level, and the fed has that oopsie moment, if you take the fed at face value then they’re going to wait quite some time to make sure that this inflation overshoot is actually real. So as much as we might, in next summer, see higher core and realized inflation, perhaps a little bit more wage inflation, maybe the long end of the bond market starts to price a little bit differently, which would be good news because you’re getting higher realized inflation and you assume higher wages, so that’s a good recovery.

James Aitken:

You know, this fed is not wanting to knock it on the head, but there’s a flip side to all of this. When Jay Powell says, “Oh, we have the tools to combat high inflation” what he’s actually saying is, “We know how to cause a recession”, and that’s not the day you want to be overexposed to some of these growthy stocks, but that’s some distance away. So look, I think we’re coming out of an economic catastrophe, to begin with, very rapidly. We’re going a bit sideways here. A lot of uncertainty, lock downs, difficult new year. We all know that. So it probably means that the growth … the economic data for the first part of 2021 is not going to be great.

James Aitken:

You’re probably not going to see inflation pick up too much for a while, but then as you move through the second quarter things start to pick up. And that’s why I keep using reflation-… i.e. recovery, as opposed to deflation, disinflation, or inflation itself. I’m going to take it by degrees. But then to Bill’s earlier point, there are investments available today where you can hedge against some of those unfortunate outcomes down the road. And whether they’d be miners, who have restructured their balance sheets been to hell and back paying reasonable dividends with some of the toughest names in the business running them, or other forms of hedges, including just commodities full stop, there’s quite a few things to own today. If you’re worried about reflation turning into inflation, things that’ll serve you well if there’s a regime shift. Sorry, let me be precise. Things that’ll serve you well in reflation, but also should serve you well-

Grant Williams:

Right, also [crosstalk 01:19:54].

James Aitken:

… if you go into the inflation.

Bill Fleckenstein:

Right. They work in both environments.

James Aitken:

Yeah. Isn’t it striking, guys, so many commodity prices are breaking out. It’s so interesting. Not all of them, but so many, and people get wound up. Everyone’s an expert at 1771. “Gold is rubbish”. And then it goes back to 1900 and “Oh, you’ve got to buy”. Well, guess what? It’s just range trading for the moment. But so many other markets are breaking out and this is a classic reflation cycle, so far at least, right? Classic reflation cycle. Commodities bust out, people don’t understand why. Well, maybe things are doing a bit better than we thought.

Grant Williams:

Actually, one other flip side to that is something that we touched upon in our first conversation. And we talked about the dollar and you said that “Stop worrying about it. They’re everywhere, they just sometimes get stuck”. So obviously, what we’ve seen since then is evidence that it seems they are everywhere and they’re not necessarily stuck, and the world is swimming in them, which we kind of … just, if you can update your thinking on the dollar and the part, or the extent to which, that is informing this commodity breakout and how you see the dollar right now. Because it does seem to … the tide seems to have turned.

James Aitken:

I wonder whether commodities and the dollar are two sides of the same coin, if that makes sense. I mean, let’s face it, you can’t hope for any sustained move in various commodity prices, whether it be copper or to some extent oil, unless you simultaneously believe the dollar weaken to some extent. Yeah, more dollars were liberated over the course of 2020, well from April onwards, which is no great surprise. A lot of the Monday morning quarterbacking of the plumbing in March, April was off beam. To this day, so much of the discussion around Eurodollars and everything else, I’m afraid, is just nonsense. You’re getting, I’m afraid … Well, it’s the tendency these days, isn’t it? If there’s a complicated area that people struggle to fully understand then there must be some conspiracy around it, or something going on with Petrodollars, all that kind of stuff, which I should strongly say, is best ignored.

James Aitken:

So what do we got? Well, every central bank in the world is very dovish as far as the eye can see, but one central bank is far more dovish than all of them. And that’s the fed, right? Maybe it’s as simple as that.

James Aitken:

And if people start to appreciate that the fed, more than any other central bank, is making full use of their dual mandate by holding interest rates down and shoving liquidity out the door until they discover what maximum employment is. And by the way, just another sidebar. The assumption is that maximum employment has to be somewhere lower than where we got to at the end of 2019.

James Aitken:

Now that’s probably true. Yeah, that’s probably true. But what if there’s labor market shortages in 2021, and it turns out that the Phillips Curve lives? Who would imagine, right? We don’t know, but that’s just a sidebar. But you have an extremely generous fed compared to its peers. You have this obsession with CFTC reports about dollar positioning, which give you a fraction, a fraction, of the true positioning and currency markets. And you have a dollar that keeps leaking most weeks.

James Aitken:

It’s breaking out and it’s breaking out versus low yielders as well. I mean, to see the Taiwan dollar … and just forgive me, I’m just going to type it up here. But to see the Taiwan dollar breakout of, what is it, a 15-year range, is quite a remarkable thing. Where are we going here? Actually, it’s longer than that. The Taiwan dollar is trading at a … let me just check this. I’m going to say it hasn’t been this low since the Asian crisis, but I may be wrong. And this is … Yeah. Taiwan dollar just above 28 to the US dollar. We haven’t been here since the late ‘90s. But I could go down the list of other low yielding currencies and it’s the same pattern.

James Aitken:

And it’s like something really profound is happening here, and we’ve got all these breakouts and it strikes me that people are trying to fight it, which is weird.

James Aitken:

So from a pure plumbing perspective, look, as we tried to say earlier in the year, there’s too much noise and silly talk around the plumbing and how it works still. And the dollars they get stuck, they have been liberated. We got a little bit of tightness in dollar funding markets through year-end, again, but we’ve had that every year end for five or six years, right.

Grant Wiliams:

I was going to say, that’s nothing new. Yeah.

James Aitken:

And I’m sure it excites a few commentators, but bank treasurers and others take it in their stride. People who rely on short-term dollar financing know how to prepare. And the last thing you’d want to have happen to your portfolio at the end of this difficult year is to have a fumble with your funding in the last 17 days of 2020, you know what I mean? So I know there’s a few things in motion, cross currency basis and we can go down the list, whatever. I’m inclined to sort of take it in my stride. And my best guess is sustained dollar weakness in 2021. Now I’m not going to win any prizes for that.

James Aitken:

Bill, there’s something else that you mentioned, and I think we discussed it in the last time but we should revisit it. You know, who’s going to digest all these treasuries? Well, it’s interesting when long end US yields picked up on the vaccine is the Japanese came in, in the most massive way, as I’m sure you’ve read. They just couldn’t get enough long-term treasuries, because currency hedging or not, great. Get me yield. We understand treasuries. But I think in the back of their minds was less of a view about 10-year treasury at 95 to 100 basis points then, “Oh, what can we do to keep dollar yen stable”, right. Now, I’m not talking about the bank of Japan I’m just talking about team Japan, who have done a marvellous job over the past several years of making dollar/yen the most boring currency pair in the world.

James Aitken:

So, is it about the treasury yield or is it about keeping the end roughly where it is? But the broader point is if you want to incentivize, let’s stick with the Japanese investor, to roll over their exposure to treasuries, or US credit, or critically AAA transfers of CLOs then you’re not going to be able to offer them a high yield for a while, particularly in US credit, which is why GPIF and Norinchukin are saying, “Oh, we’re not rolling over their AAA CLOs”. But if on the other hand, if you give them a cheaper dollar to offset the low yields they’ll be back, but we’re not there yet.

James Aitken:

And the adjustment in dollar yen, for example, required to entice the Japanese institutional investor back to US credit. I’ll just say it’s a fair bit lower than where we are tonight.

James Aitken:

But it’s worth keeping in mind.

Bill Fleckenstein:

Would you think it’s 5%, or 10%, or just no way to know it?

James Aitken:

We don’t know yet.

Bill Fleckenstein:

Okay.

James Aitken:

But put it this way, team Japan has done the most marvellous job of keeping dollar yen effectively pegged. It’s remarkable. I suspected eventually it heads below 100, but who knows how long that takes. They’re going to resist it all the way, I’d expect.

Grant Williams:

James, there’s one other thing I’d love to get your thoughts on it, when we go through this transition from 2020 to ‘21, there’s … obviously, there’s a line in the sand here with regards to Brexit. And obviously, you’re based in the UK. When we look at all the posturing that’s going on now, as we count down the days now, until this event happens after, what, six years of talking about it. First of all, shame on all of them for bringing it down to the wire. But I guess it was always going to happen this way. How do you see the outcome and what do you see for both sides next year as the most likely path?

James Aitken:

I think Arnold Schwarzenegger got it right. And he was interviewed in the Financial Times, Grant, in May 2019. And I’m surprised in the Financial Times, given their bent on all of this, asked him about Brexit. And Schwarzenegger said “Every single article that comes up on my iPad I immediately erase it because it’s all the same shit. Hello. It’s like a documentary that’s going on too long”. So, if you can imagine the Arnie voice doing all of that, right.

James Aitken:

And I think Mr. Schwarzenegger had it bang on. Look, there’s a number of ways of looking at this. Firstly, the unnecessary drama, right? Unnecessary drama. All these unnecessary cliffs. Now, we’ve had a little bit of a development in the past 24 hours, but guess what? What we thought was a deadline is not a deadline. Well, that’s been the case for four years, which is part of the problem, right?

James Aitken:

You know how these European crises work. You get down to a Sunday night at about 2:00 AM, everyone’s exhausted, they can barely talk and there’s a puff of smoke saying, “Oh, look we’ve saved the day”. And part of the problem here is that Merkel was a bit displeased with Johnson’s internal markets bill, which was kind of meant to be a backstop if the deal’s failed … if the trade discussion failed. So Merkel’s letting Johnson twist in the wind a bit. But here’s the thing, it’s 2020. It’s been a really, really difficult year. It’s required an enormous amount of government balance sheet, meaning taxpayer balance sheet, to keep things on an even keel. And for obvious reasons, the European Union does not want the UK to get away scot-free. They hope that it might be a very difficult period for the UK. The UK thought they were negotiating a trade agreement with the European Union. The European Union thought that the UK was negotiating to stay in the single market, and then at the last possible minute they realized they we’re talking about different things.

James Aitken:

Now, we could go through all the different scenarios, but I think the parties here, as has been the case for many months, they’re incentivized to work out some kind of arrangement. And that doesn’t mean a free trade deal, but it means an arrangement to avoid unnecessary instability.

James Aitken:

So we might have another six months to iron out the fine details of this, that, and the other. So we have a breakthrough. Yes, we’ve agreed. We’ll now hand it down to our staff to sort out the fine points. But let’s cut to the practical chase. Nobody cares.

James Aitken:

Nobody cares, right? I mean, we’ve had four years of this and yes, some industries may struggle. There’ll be congestion at the ports, the FT, the economist, the BBC and Mike Bloomberg will be having hissie fits and jumping up and down about every little thing that goes wrong.

James Aitken:

So for example, this week, you’re seeing all the news about the catastrophe at the port of Dover and the trucks backed up down the M20, Grant. Yeah, to get the vaccine in and out.

James Aitken:

And people restocking for Christmas. “Oh, it’s Brexit. This is what’s going to happen”. It’s like just … it’s just a bit silly. What I think, and it’s impossible for me to be objective about it because I live here-

James Aitken:

But when I try to be objective from a financial markets perspective, the unavoidable fact is that UK equities, in particular, have rarely been this cheap and rarely been this under-owned. Now, we can understand why, but there are some very great UK listed companies. Some with a domestic focus. Some, obviously if we look at the FTSE, with a global focus. We know that. They’re, broadly well run. Sterling, for all the huffing and puffing, remains under owned as well. We all understand that.

James Aitken:

Where I come out is that I don’t think you need much to go right, or dare I say, you don’t need the delta on the headlines to change much because it’s all skewed to what can go wrong.

James Aitken:

So you don’t need much of a change here, I suspect, to generate a pretty powerful structural rerating of specific Sterling assets and also Sterling itself.

Grant Williams:

The currency. Yeah.

James Aitken:

It’s a long, long way back. It’s a long, long way back. But the UK, too, has some extraordinary world-class technology companies. It has some obvious science companies, as we’re seeing over the past little while. And it’s interesting that when people thought that there was more clarity emerging on Brexit, that UK inbound M&A I picked up a lot during the summer and autumn of 2020, there are a lot of inbound M&A deals.

James Aitken:

Now look, there’s a flip side to this. It is still possible that these talks fail, but they will fail from the perspective not of sour grapes, or we want to stuff them. They will fail from the perspective of, “We tried really, really, really hard to make this work. We could not. We’re going to work out how airlines keep flying. We’re going to work out this and that because we don’t want a hard stop. So we tried our best. It didn’t work out”. And obviously, in the short term that’s not a positive for Sterling. We know that.

James Aitken:

But then there’s a technical point to this. And the UK, out of kindness, has given European financial institutions comfort on what’s called equivalence in financial services, and given the importance of LCH Clearnet to the global financial system, that was very generous, indeed, for any European institution who clears in London.

James Aitken:

Unbelievably, with 17 days to go, Brussels has not given any hard binding guidance to European financial institutions of whether equivalence will apply the other way, which is extraordinary. Because if I was trying to imagine a way to really upset the plumbing of the financial system, it would be to mess around with central counterparties and central clearing, or to tell people that you don’t get any benefit from netting off your derivative exposures, or actually as of two weeks time you’ll have to change your counterparties with whom you clear, you’ll have to change your collateral arrangements, you’ll have to do this, that, and the other.

James Aitken:

That would be very dumb. So I think we’re getting a real time reminder, yet again, that certain European institutions, and I’m thinking about the commission in particular, really don’t care about financial markets at all.

Grant Williams:

Yeah. Well, it’s interesting because the clearing was the place that, in a previous conversation, you said that that was the place you were looking at for potential trouble.

James Aitken:

Yeah. I mean, it’s so unnecessary, so much of this. But the fact that over the weekend these conversations between London and Brussels were extended, I think, does point to an element of the parties involved don’t want a smash up.

James Aitken:

I mean, of course the Europeans expect that this will be a catastrophe for the UK. Time will tell. But I think it is correct to say that neither side wants a smash up. And again, it’s very, very difficult for me to be objective about it because I’ve lived here for almost 22 years. But I do think that if the headline risk is removed, for whatever reason, then my best guess would be a structural rerating of specific Sterling stocks and Sterling itself might last for many years.

James Aitken:

Possibly. Now, do we want to talk about oil or Bitcoin at all?

Grant Williams:

Yeah. No. No. Bill and I always try and Bitcoin until last so that we can assume the fetal position under our desks for all the incoming. But let’s do oil first and we’ll save Bitcoin for last, because that way we make all the Bitcoiners have to listen to the whole podcast.

Bill Fleckenstein:

You assume … Wait. Wait. You assume any are listening to begin with.

Grant Williams:

Well, yeah. But that’s before we … well, I say we’ve lost them. You’ve lost most of them.

Bill Fleckenstein:

Of course it’s my fault. All the bad things are my fault.

James Aitken:

There you go.

Grant Williams:

James, you mentioned oil earlier on … and I did want to come back to that. You mentioned it. So let’s talk about that because obviously … I mean, it’s hard to think of an asset that’s had a more extraordinary year than oil for many reasons.

James Aitken:

Yeah. It’s struck many of my clients as odd, given what I’ve been writing about ESG and all those sorts of things for some time now, that in the teeth of all of that in this global economic catastrophe I could for the past several months have been recommending oil and one or two oil stocks. And the logic is this; look, there’s no doubt that all those climate types and ESG warriors intend to destroy the demand for non-renewable energy. I mean, we all know that and it may take them some time. And the other point being, of course, is if we’re aiming to reflate the world and get it going again and flying again, we’re going to need a lot of oil, we’re going to need a lot of kero, we’re going to lead a lot of diesel, and all these other things, right, obviously.

James Aitken:

But I think that the real impact of ESG and climate change discussions is that, yeah, ultimately they want to destroy demand for non-renewable energy but first they’re going to destroy supply, because anyone who wants to start a new oil well, or a new non-renewable project right now can’t get funded.

James Aitken:

Right? Well, they can get it privately, but they’re not going to get it from any large buy-side firm and stuff like that. And let’s face it, any shell producer who’s made it through 2020 is not about to rush out and turn on his or her taps. There’s going to be some very strict supply discipline. And OPEC has even managed to discover some supply discipline as well. So when I look at all of this and I look carefully at product markets as well, particularly from the summer of next year onwards, and I say to myself, “You know, I think the oil market’s looking all right here. And I think specific energy companies that have really focused on their businesses, and balance sheets, and assets are well-placed to enjoy that reflation trade as well as we go through 2021”.

James Aitken:

So it’s nothing terribly complicated but it’s looking at oil from a top-down perspective. It’s looking at supply discipline, it’s looking at the endless ESG and climate narrative and just trying to find good assets at reasonable prices that can help me muddle through that period. And to talk my own book, one company I’ve been focused on is Hess, in the United States, and no doubt anyone could … I’m sure listeners could think of racier examples, but Hess has been the one for me because I respect the board and know certain board members and think they’re first-class thinkers and operators.

James Aitken:

And look, as we came through the autumn, prior to the vaccine news, Hess was trading per share for less than its stake in this enormous Ghana oil field that they’re developing with Exxon. And I thought to myself, “Well, in the high 30s, when the known value of this oil development in Ghana is $40 conservatively, I feel comfortable buying that”. And then you get the vaccines and it all happens a bit quicker.

James Aitken:

But just to think tactically, as most people in the oil markets know, there has been a very large buyer through the market over the past week out of Asia. An oil importer fixing their costs for 2021 because they think the world’s going to reflate. So it’s no surprise to me that the oil price has come off a little bit because this flow, this hedging flow, is now complete.

James Aitken:

And obviously, Grant, given what’s happening in the Northwest hemisphere right now, given lockdowns, you’re not expecting Western energy consumers to jump in and buy more oil and other things right now. So there’s going to be a little bit of an air pocket here. So I need to be patient. I’ve had the easy part of it and now it’s going to have to be patient.

James Aitken:

And the same applies, frankly, for a lot of these other vaccine reflation trades, or plays, however we think of them. They had the rerating and now they’re just doing nothing, so we’re going to have to be patient here. But I think being long oil and specific oil plays ought to serve one pretty well as we go through 2021. And then we need to move on to the … what was it called?

Grant Williams:

Let’s just call it the B-word.

Bill Fleckenstein:

Crypto.

Grant Williams:

Let’s call it the B-word.

James Aitken:

Crypto. Yeah. Here’s the thing. My founding clients were two of the earliest Bitcoin investors and they’re very, very sharp people who I helped a lot in ‘07, ‘08, which is why they were my first client 11 and a half years ago. They weren’t buying Bitcoin in the thousands, or the hundreds, or the tens they were buying it for dollars.

James Aitken:

And they’re good fellows, and they were working on the architecture, involved with this for a long time, but I never frankly believed it. I really didn’t. I thought that the blockchain technology itself, and title transfers, and ledgers and everything else struck me as something that could be very, very meaningful but I was never totally convinced by Bitcoin itself. And then you fast forward to, say, 2015 and all of a sudden every macro trader I know is involved, or starting to get involved, and talking up a storm.

James Aitken:

Now why? Well it moves, and the skills that you would have once deployed trading dollar yen, which would move four handles in a London morning, those skills are transferable to trading and selling Bitcoin that’s all over the place. And one or two of them they’d been confided to me later that they made more money trading Bitcoin through 2017 than they made in their, frankly spectacular, macro trading careers, which I thought, gosh that’s interesting.

James Aitken:

Now, fast forward to this year. What’s the big change this year? Well, you know what? You can put any valuation on Bitcoin you like, but obviously given it’s trading at nine and 1,000 there would appear to be more buyers than sellers around. And as tempting as it is to think that there’s, and I’ll say this, euphemistically there’s a wee bit of hype around Bitcoin at this particular point, it is true to say that the institutional money is starting to arrive. To be clear, I don’t mean the hedge funds that have said we’ve got some and it should be in a portfolio. I’m talking about some remarkably conservative long-term investors who have, over the past several months, created or established their first Bitcoin allocations. All it takes is one or two of these large conservative investors to decide right or wrong that Bitcoin ticks some of their hedging box and it’s off.

James Aitken:

Now, the other thing is, of course, that this is like dollar/yen of old because you knew who the flows were. This guy’s doing that. You could see the big tickets going through. Now, of course, the turnover’s a bit less than dollar/yen 25 years ago. It’s Bitcoin, but everyone knows when the so-called whales are putting through a trade. I don’t mean the name, but all the Bitcoin cognoscenti can see that there’s some very big tickets going through.

James Aitken:

So what am I trying to say? The institutional money is starting to arrive. It will probably continue to come through 2021. So I can be skeptical about Bitcoin for a whole bunch of reasons, but I think that the demand is probably going to win for some time to come. To my surprise, I was somewhat surprised. I discovered recently that I have indirect exposure to Bitcoin through, frankly, one of these very conservative but very good real money firms. Now, that was a surprise, but there you go. It shows how this is changing.

James Aitken:

But of course that’s the good news. The flip side of this is that some of the arguments that have been bandied about about how central bank digital currencies somehow underpin the case for Bitcoin, I’d be very wary and very skeptical of that narrative because it’s not true. Now, to be clear, if central bank digital currencies are about imposing negative interest rates, fine. I think the three of us could imagine a whole bunch of assets that could do extremely well if that happened, or should I say accelerate further. So yeah, maybe Bitcoin gets dragged along for the ride, but I’d just be very wary of these assertions that central bank digital currencies underpin bitcoin because that’s not the way central banks think about digital currencies…

Bill Fleckenstein:

Well speaking of that, it seems to me one of the risks that I don’t see addressed when all the chatter that you can’t escape on Twitter about this is, and this is one of the risks that kind of keeps me from wanting to participate, and that is it seems as though the Chinese are determined to move forward with the digital Yuan, and since a very large amount of Bitcoin appears to be held in a small number of addresses that appear to be in China, and I wonder is that not a risk that one would have to consider? Or you’d have to convince yourself it’s not a risk of them deciding that they don’t want the competition with their digital Yuan and they do something specifically? It seems to me like they’ve made rumblings that perhaps they’re not exactly Bitcoin friendly, which to me could easily turn out to be a big deal. Do you have an opinion about that?

James Aitken:

Well, I don’t think as best I can tell, I mean, that’s the way we should always phrase any observation about the Communist Party of China because, unless we’re on the Politburo standing committee-

Grant Williams:

And Bitcoin.

James Aitken:

What’s that, Grant?

Grant Williams:

Yeah, and Bitcoin.

James Aitken:

Yeah. But unless I’m on the Politburo standing committee, any observations I make on what the Communist Party of China thinks they need to be taken with a grain of salt. However, I doubt that they’re entirely enamoured with Bitcoin, but that’s not the point. The point is that China’s DCEP as it’s called, digital currency electronic payments, is the biggest pending change to the financial system we’ve seen in… Well, this’ll sound a little dramatic, but I think it’s the biggest pending change we’ve seen to the financial system since Bretton Woods ended.

Bill Fleckenstein:

Wow.

James Aitken:

To be very clear, there is nothing benign about China’s digital currency electronics payment project. There is nothing benign about it, and I’ve been spending a lot of time over the past three months in particular… Actually no, four months in particular on this DCEP thing. Three Fridays ago, I was very fortunate to participate in a call, and it was a phone hookup under Chatham House Rules, and it had some extraordinary people on that call. It was intelligence people, it was a very well-known central banker, treasury officials, all sorts of people. I won’t say more than that, but people are on it because a bit late in the game key people have realized that as much as the Chinese and former Governor Zhou of the People’s Bank said again today, “Oh no, no, no, no, no, no. DCEP is no threat to dollar hegemony.”

James Aitken:

No, no, no. It’s exactly what it’s designed to do. It’s designed ultimately to do an end run around the dollar-based financial system. People are realizing, uh-oh, we need to have something to give people an alternative to China’s DCEP but we’re years behind. Because given how rapidly this pilot program is rolling out, it won’t be too long before huge chunks of the Chinese economy are using this DCEP thing. Let’s call it a thing. Then not long after that, any foreign business operating in China might well be obliged to open a digital wallet in the mainland using DCEP, and I would think that ought to raise a few cyber concerns.

James Aitken:

So this is an end run or attempted end run around the dollar based financial system with enormous implications. It is the DCEP, rather than Bitcoin or cryptocurrency out there which explains Central Bank’s enthusiasm for central bank digital currencies. So to be clear, it’s not Bitcoin that is incentivizing this central bank clamour for central bank digital currencies. It is a belated recognition of the intent of China’s DCEP, and they are way behind the curve, but I hope for the sake of all of us that their progress towards central bank digital currencies accelerates, particularly in the United States in 2021. Now of course, that all sounds well and good and I don’t know when the impact of all of this hits. I don’t know when the impact of all of this matters, but of course we should never ever underestimate the determination of the Communist Party of China and Xi Jinping in particular.

James Aitken:

So I’m spending an awful lot of time on this DCEP. I’m listening to a lot of people. I’m understanding the consequences. I’m trying to sketch out for my clients how they should think about it, what they should watch and things like that. So it’s not a thing that one trades, but it’s something that one needs to be aware of, and I think of it as the biggest plumbing challenge that we’ve had in many, many, many years. It’s basically an attempt to overturn the global financial system as we know it.

Grant Williams:

Silence. Okay.

Bill Fleckenstein:

Yeah. Well…

Grant Williams:

Look, the whole digital currency landscape is extraordinary, and then obviously…the gateway drug has been Bitcoin and that’s what’s got people frothing at the mouth. I understand the case for Bitcoin; absolutely I do. I think anyone that has spent years looking at gold like I have understands innately what Bitcoin’s all about, but there are plenty of questions that I have yet to have answered satisfactorily to me. So I’m not a disbeliever, but I have skepticism about me.

Grant Williams:

But when you talk about this DCEP and what it represents, it kind of strengthens the fears I have about there being no way that Bitcoin can ultimately be allowed to coexist with these currencies. Am I reading that the wrong way or not?

James Aitken:

Don’t know yet because I think it’s an iterative process. My best guess is that given the nascent institutional demand for Bitcoin is that in the first instance, as people read more about DCEP and central bank digital currencies in the West, that that will actually serve in the first instance, right or wrong, to underpin the enthusiasm for Bitcoin, right?

James Aitken:

That’s my best guess. Ultimately though, I think you’re raising important concerns, ultimately. I don’t know what the timetable is. I don’t know what Bitcoin might reach in the interim, but to be very clear, the motivation for central bank digital currencies is not Bitcoin. It’s not crypto. It’s China’s DCEP because the West has finally woken up to like, “Oh my gosh. You mean they’re trying to rewire the global financial system while we’re distracted?” Yes. That’s exactly what they’re trying to do and they’re getting away with it, right? By the way, that’s part of the reason why they gave Alibaba and, well, Jack Ma in particular a bit of sanding with Ant Financial because you’re not going to be able to operate this DCEP without the existing infrastructure that Alipay and Tencent Pay provides.

James Aitken:

So look, to be clear, I’m coming at China’s DCEP, at least at the start of this year from a cold start. But I’ve been reading extensively about it over the next four months once it was made clear to me what this project is actually about. And look, so believe me, I can understand that it might be a difficult period for Bitcoin if people eventually appreciate what this is all about and what’s going on. But put it this way, if China’s DCEP is up and running and it’s the only means by which foreigners can do business in China, and then hopefully, hopefully we have some kind of dollar-backed alternative in the West, then hopefully we can rewire the financial system without too much trauma. But I’m not sure where that leaves Bitcoin, ultimately. I’m not sure.

James Aitken:

But I want to be clear, for now, it doesn’t matter. It’s not some of the other things we discussed…

Bill Fleckenstein:

No but it… No, it does matter from this standpoint. If you own a macro asset like gold or Bitcoin or some of these things that don’t have day-to-day fundamentals. I mean you can’t say, well, I’m going to go see what… get some idea what sell through is, I mean you can’t get an edge on the price very easily by looking at the macro variables on a day-to-day basis. So you own this and you have to figure out how do you manage your risk? Well position size is obviously one.

Bill Fleckenstein:

So how do you have a position size of enough of a consequence to make a difference if there is the risk at some point that the Chinese are going to say we’re not really very keen about this, and if that’s what they decide, they will get their own way given the fact that so much of it is held there and mined there. So how does one, if you think that that is a risk in the back of your mind, which seems to me to be a legitimate risk, then how do you know on the day that it’s down $500 or $1000 or $1500 that it isn’t the start of that problem displaying itself?

Bill Fleckenstein:

So that’s the concern that I have is I know I can’t manage the risk. When I know these problems are out there, I don’t know how I’m going to do it. If I sell it the first time, it’s down 500, I could be doing that three times a day, right? So that’s the thing that gets in my way is some of the risks that are very tangible it seems, and large, I don’t see much consideration. And the other thing I wonder about is, and maybe I should know this, but if we’re going to be at the end of the Bitcoin creation or however you want to say it, spawning, sometime this year-

Bill Fleckenstein:

Wait, wait, then who’s going to maintain the network? Because the miners that maintain the network get some vig for that. Who’s going to do that?

James Aitken:

Yeah, I wish I had a good answer for that. Just to tease out a couple of your comments, Bill. I think most Bitcoin aficionados either know or anticipate that the Communist Party of China might not be the biggest fans of Bitcoin either now or ever. I think, therefore, what people might be worried about at some point is that Western democracies or Western treasury departments or finance departments say, Hey, this Bitcoin thing we need to knock it on the head a bit and regulate it.”

James Aitken:

Now, on the one hand, if we said, “Oh, they’re going to regulate Bitcoin, or we need more transparency on wallets,” whatever they do, you’d think to yourself, oh gee, that’s a bit of a negative. But there’s a flip side to it as well. There’s an alternative.

James Aitken:

If you actually do the right things and say that do KYC on Bitcoin holders and everything else, maybe that serves to institutionalize the asset. I don’t know.

James Aitken:

But to be clear, I think we’re not there yet, perhaps, but to be clear, China’s attitudes to Bitcoin I think are I think a lesser concern longer term than some other democracies, but we shall see. But there’s another angle to this which is fascinating, and it’s Zuckerberg. It’s Mark Zuckerberg. Now, I’m never quite sure what to make of him. Typically, when they rolled out Libra, which was ironic in the extreme given the name, he 0didn’t give much thought to the political consequences. It was an opportunity for a Facebook stable coin to provide a kind of digital passport for the world. I mean, it was fiendishly clever, but “Oh no, no, no. We’re going to move fast and break things.” No, you’re not, and he ran into a brick wall with global regulators and financial policy makers.

James Aitken:

But whatever, again, one thinks of Zuckerberg, he’s a very smart kid. He’s very smart, and he said, “Hold on a second, what else is happening out in the world? But wait a minute, we might be the only company with a platform that can outrun Alipay and WeChat Pay, and therefore, we might be the only company in the West that can provide the infrastructure rapidly to be the offset to China’s digital currency electronic payment project.” Oh. So this is interesting to me. And you would have noted in a lot of his testimony, in the latter part of this year, how Zuckerberg has become this China hawk, right? It’s very deliberate. I say this only partly in jest; it would seem to me that Zuckerberg’s first step to coming out as a US patriot is to first hate China, right, because patriotism and Zuckerberg up until now I’ve struggled to reconcile those two for obvious reasons. But he thinks that he can help create the Western equivalent or the dollar-backed equivalent or something like that of China’s dual currency electronics payments project, right?

James Aitken:

I’m watching that as well. Now, I don’t know what that means for Facebook’s valuation. I don’t know what that means for Facebook’s earnings, but it is true that if the United States, in particular, wishes to rapidly catch up with what’s happening with China’s dual currency… A dual currency? Oh my gosh. That’s such an old thing to say. Sorry, time out. That reveals how old I am because remember 25 years ago we used to talk about foreign currency, dual currency bonds in Japan…

Grant Williams:

No listen, we’ve all dated ourselves because Bill and I didn’t flinch.

James Aitken:

Oh. The power reverse dual currency bonds. Oh gosh, anyway. So what I meant young listener was digital currency electronic payments in China, but it’s a serious point. It seems to me that Zuckerberg has figured out that the only way the West can catch up is by using his technology, and he might be right. He might be right. But really what we’re sketching out here is a profound change, or to begin with they had really intense competition around who runs the financial system of the future. Are we going to have a dollar-backed financial system as we knew it, or are we going to have a digital renminbi backed financial system with, quite frankly, all of the horrible problems that will entail? That’s what this is about.

James Aitken:

So to be clear, very tricky to trade. I mean really tricky to trade, but we all have to be aware of what’s happening as market participants. We need to keep an eye on it. I, for one, have set up all those alerts on DCEP on my Bloomberg. So I get all these headlines, and I’m getting 25 a day. I mean, they’ve now got the trial running in Shanghai for DCEP. Now they’re rushing it out in other parts of China. They’re going for it, but I think they’re going for it because, frankly, up until very recently, Washington has been asleep at the switch. But it’s extraordinary to watch the… I mean, no surprise about Xi Jinping’s breathtaking ambition on so many fronts. But this one, for us, for those of us working in financial markets and thinking about asset allocation and everything else, I mean I don’t know about you fellows, but I don’t particularly fancy opening a digital renminbi wallet in mainland China, given the data I would have to hand over.

James Aitken:

That’s just for starters, right? Assuming of course that was the only way I could do any transactions in mainland China. To be clear, I don’t, but these are, to me, is a really important, difficult, complicated topic, but it’s the biggest plumbing question I’ve been confronted with in my career.

Grant Williams:

Wow. That’s some statement coming from you I have to say. I just love the fact that we’ve sat here and chatted for two hours and your mic drop moment is to send everybody down a rabbit hole that could consume them now for months to come.

Bill Fleckenstein:

Yeah. So we’ll have to come back and revisit DCEP down the road and see where it is.

James Aitken:

I’m telling you, it’s going to be a real BBQ stopper Bill. I mean try it at a few dinner parties over the new year in Seattle. I’m sure people will be riveted.

Bill Fleckenstein:

I’m sure. No doubt.

James Aitken:

But Grant, if I may, I wanted to read you something that I think encapsulates so much that’s happening in the world right now and dare I say, I think it’s how the three of us and many of our friends think about stuff. It’s from an overlooked macro strategist of decades gone by. So just bear with me. I want to read this quote: “I think that I am superior to the common run of men in noticing things which easily escape attention and in observing them carefully. My industry has been nearly as great as it could have been in the observation and collection of facts. What is far more important, my love of natural science has been steady and ardent. From my early youth I have had the strongest desire to understand or explain whatever I observed. That is, to group all facts under some general laws.” Almost finished.

James Aitken:

“These causes combined have given me the patience to reflect or ponder for any number of years over any unexplained problem. As far as I can judge, I am not apt to follow blindly the lead of other men. I have steadily endeavoured to keep my mind free so as to give up any hypothesis, however much beloved, as soon as facts are shown to be opposed to it.” I thought those words were appropriate at a time when we have an awful lot of people big dicking it, and who are absolutely dogmatic in their opinions on all sorts of financial assets, as opposed to the perhaps safer route of pragmatism.

James Aitken:

I once met this fellow in Seattle and he had this motto “often wrong, never in doubt.” I’ve got another story there, but those words I read out were from a very famous macro strategist called Charles Darwin. That’s from Charles Darwin’s autobiography and I was rereading it the other day, as you do, whatever. And I just thought that is such a great way of thinking about investing, asset allocation. Look, I think one of the common threads of some of the most wonderful investors I’m so fortunate to work with and for is that they can be pounding the table dogmatic about something tonight, and then they’re out of it tomorrow morning. Now how on earth do you do that? I mean, people take it for granted. It is a very great skill.

James Aitken:

Exhibit A of that in decades gone by would have been Mr. Soros. Famously, his back hurts. Right, I’m getting out of this.

James Aitken:

But I thought that was a great way of thinking about what’s happening right now and to try and be balanced and sensible and to just figure out ways to survive and thrive no matter what Mr. Market throws at you, no matter what are central banks doing because, let’s face it, if we’re able to stay in the game long enough, there’ll always be something to do.

James Aitken:

Final, final thing I promise, I was thinking the other day, how did I get to know Bill. I remember reading his stuff, gosh, it must have been in 1999, 2000, and I’d read it on the website. I’d think gee whiz, this is super interesting. Bill, I don’t think I tell you this enough, but it really helped educate me about excesses and bubbles in markets and it was extraordinary stuff to read your, let’s call it a blog, because it was a blog at the time. So eventually, Grant, I plucked up the courage to send him an email, and “Dear Mr. Fleckenstein, sir, and… I’d read your stuff,” and I got the most moving, touching reply which I framed, and it’s been a motivation to this day. It was very, very, very moving, and it just said, “Thanks.”

Bill Fleckenstein:

Was it spelled correctly?

James Aitken:

No.

Bill Fleckenstein:

No. No. Then it was from me.

Grant Williams:

Yeah, these days, the thing is you’re lucky. I think it’s just TKS these days. I think it-

James Aitken:

Yeah, I mean it was a very special moment and it really, really motivated me to get more involved in financial markets when the big dog in Seattle says, “Thanks.”

Bill Fleckenstein:

Well that’s thoroughly embarrassing. Can we go now?

Grant Williams:

We began with a big dick, we ended with a big dog, and in between there was, I mean so much to think about James. I can’t thank you enough for that. That is going to have people, once again, heads spinning and as I said, rushing off down a path to try and understand DCEPs.

James Aitken:

Well, as I said, it’s a real dinner party conversation stopper when you start bringing up the DCEP. I mean, people just can’t get enough of it, right? Especially in lockdown.

Grant Williams:

With any kind of tailwind, hopefully the three of us can actually sit down to our own dinner party in person over some of Bill’s expensive red wine and talk about DCEPs from a more educated standpoint in 2021. How good would that be?

James Aitken:

Oh, now you’re talking. Now you’re talking. And I think-

Bill Fleckenstein:

Bottomless glasses of Chav for you.

James Aitken:

Chav, now there’s a great asset. Great asset, great price, and there’s been a few distressed sellers around, and it’s just magic stuff isn’t it? Magic stuff.

Bill Fleckenstein:

Yes, yes.

James Aitken:

But look, I’ll get all shaky here now, but I think just we’ve had this amazing year. Another humbling year for me and I’m sure many of us. An extraordinary recovery, or at least to begin with, which reminds us of the sheer power of coordinated monetary and fiscal policy. I know it’s very tricky… Well not very tricky, but it’s somewhat tricky tonight when we’re recording this too, we’ve got renewed lockdowns and everything else happening, it’s difficult to imagine that we can have this reflationary impulsive you call it or tailwind can continue. But I keep looking at my screen this week and last week thinking, man, the outlook for company X or company Y has improved. Its earnings guidance has gone up, and yet it’s derating. Now that sort of tells me that the reflation trade or the vaccine reflation trade if you will, has not really started yet, right?

James Aitken:

The one thing I regret that I’m remembering it now, Grant, because I meant to mention it so forgive me, there’s been analyst debate over the years about the bond vigilante, right? Is the bond vigilante dead or alive? Well I think for various reasons the bond vigilante’s dead, but the stock vigilante is alive and well. At the most basic level, we all could have learned a lot. I know I certainly learned a lot just keeping fully focused on the guts of global stock markets through 2020. I don’t mean in March/April as much as through the summer when vaccine losers stopped going down. Well what’s that about? So something’s changing.

James Aitken:

So the bond vigilante might be RIP, but the stock vigilante is alive and well. I imagine I’m going to continue to learn a heck of a lot from the stock vigilante as we move through 2021 because as tempting as it is for highfalutin’ folks like me with the credits and rates and FX and macro background, as tempting as it is to say, “Oh, equity markets don’t understand anything,” well actually, truth be told, they understand a lot.

Grant Williams:

Interesting. Really, really interesting. Mate, look, it’s been a fantastic couple of hours, and thank you so much for being so generous with your time. Bill and I have been looking forward to this since we all agreed on it a few weeks ago, and it’s exceeded I think every expectation we had. So mate, thank you so much, and all the best to you and the family for what remains of the holidays. Merry Christmas to you and, say hopefully, the three of us can get together in the new year in person.

James Aitken:

Well, that’ll be a podcast and a half won’t it?

James Aitken:

Might only be able to use about three minutes of it.

Grant Williams:

Yeah, but it’ll be a good solid three minutes though.

James Aitken:

No, but I’m grateful to you both. It’s just good fun to have a good old-fashioned chat and a free flowing chat. As we always say, just trying to be less wrong and Merry Christmas and best wishes to you and your families and all the listeners as well. Here’s to brighter days in 2021, and look, I’ve already lined up for four vaccines, two in each leg, two in each arm. As soon as they reopen Seattle, I’ll be straight there.

Grant Williams:

Attaboy.

Bill Fleckenstein:

Alrighty mate.

Grant Williams:

Attaboy. Take care, James. Thanks again.

James Aitken:

Thank you. Thank you very much.

Grant Williams:

See you, mate. Bye.

James Aitken:

Bye now.

Grant Williams:

Well Bill, as always when you sit and talk to James you are left with so many questions along with all the answers you get.

Bill Fleckenstein:

Well following along on this digital currency electronic payment system that the Chinese are working on will give us something beneath the surface to focus on for the next year or so. But-

Grant Williams:

Yeah. Yeah, because we needed that.

Bill Fleckenstein:

But to try to synthesize down what we just talked about for a couple of hours is rather hard to do.

Grant Williams:

Yeah, listen, I think everybody’s on their own with this as far as that’s concerned. I mean, listen to it twice, three times. I’m going to be editing this, so I’m going to listen to it several times. Our thanks to James. He’s an extraordinarily gifted thinker, I have to say and manages to communicate those thoughts in a way that still baffles me how clear he is about this stuff. So, our thanks to James for agreeing to come on and being so generous with his time because it’s always just fascinating talking to him. We will back. We’re not sure when and we’re not sure with who just yet, but we’ve got plenty of things lined up in the pipeline. In the meantime though, do follow us on Twitter. You’ll find me at T-T-M-Y-G-H.

Bill Fleckenstein:

And I am @fleckcap.

Grant Williams:

He was. He shall remain so. Mate, I’ll talk to you soon. Thanks a lot.

Bill Fleckenstein:

Alrighty. Since we’re going to cut this part of the tape out, I’ll let you know that… agreed to come on with us.

James Aitken:

Bullshit.

Grant Williams:

Yeah.

Bill Fleckenstein:

I’m telling you the truth, mate.

James Aitken:

Wow. Wow. Now he’s never done that.

Grant Williams:

No. No, no.

Bill Fleckenstein:

Not to my knowledge no. Uh-uh. Grant and I were happening to be speaking, and I had said to him, you know what, I had sent… the email, and small backstory on how I know him, but anyway. I said, “Grant, it’s been two weeks. He just blew me off. He didn’t even respond.” Literally later that day I got an email back from him that says, “Well, what do you got in mind?” So that’ll be a fascinating conversation.

James Aitken:

Oh gosh. That’s a good get. He’s hard as nails, but that’s good.

Grant Williams:

Nothing we discussed during The End Game should be considered as investment advice. This conversation is for informational and, hopefully, entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.

 

 

 

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