Virtual Strategic Investment Conference 2020

Panel Discussion: Returning to the New Normal – John Mauldin, David Bahnsen, Louis Gave and Mark Yusko (Moderator: Karen Harris)

The notes below are a transcription of the panel discussion.
Please forgive any typographic or grammatical errors.

Thursday, May 21, 2020

KAREN: It’s great to see all four of you back here. I’m so excited to revisit some of the fascinating themes that we have heard emerge over the last week. I want to start out with a question.

• Clearly, it’s anything but business as usual. But next year when we are all gathered back again in Arizona and can shake hands or knock feet and see each other face to face, what is the one thing that you think most people will say that, “Gosh, I wish I really understood”? Louis, let us start with you.

LOUIS: Thanks for starting with me. Where do I go with this one?

• Our world is changing so rapidly, but, look, you know, in my starting point in my investment process, I always start off with the simple reality that there are three prices that basically determine all the others. Those three prices are the US dollar, it’s the price of oil, and it’s the price of US interest rates.
• Today, the overwhelming consensus amongst investors is that energy prices are low and will stay low, that the US dollar is strong and will get stronger, and that US interest rates are low and heading lower.
• And I think in a year’s time, at least two out of three and probably three out of three views on this consensus will turn out to be wrong.

I think we—where I’m more ambivalent is the US interest rates, but I’m pretty confident that we’ll look back at $20 oil and that will have been the low and I’m pretty confident that—well, I’m marginally confident, depending on what happens in Europe and I know we’re going to talk about it over the next coming weeks. I’m marginally confident that we’ll have also been at the high on the US dollar. You know, if you have a situation where USM2 is growing at more than 20% per year and US budget deficits are absolutely going through the roof, over time, that can be bullish for currency.

KAREN: Okay. Mark, what is your view?

MARK: Yeah. So, I love the way Louis laid it out into the three big pillars. I would concur on the framework and I think the big issue for all of us is how will we understand and appreciate this massive flooding of the world with liquidity? And, okay I was wrong about it in 2009, I feel I’m going to be wrong about it again this time. I just still don’t understand, and maybe one of these guys on the panel can explain to me how it works, how the Central Banks buying a bond finds its way into equities. It just makes no sense. Banks aren’t supposed to be able to buy, the Fed’s not supposed to be able to buy, yet somehow the money leaks into the equity market through futures.

So I agree, oil prices will be higher. I actually believe that the dollar will be materially lower although a lot of people take the other side of that. And then I am glad that Louis stopped short of saying interest rates would go higher. I think interest rates are going to be devastatingly lower. In fact, I have said many times in the past couple of weeks that soon, and perhaps very soon, every interest rate on the planet will be negative. Forget low, forget zero, I put a chart up today at our around the world presentation that the global policy rate, when you average all the Central Banks around the world, the global policy rate today is zero. Think about that for a second.

KAREN: Thanks, Mark. I do want to give just a little bit reframing for Louis’ sake in that I think with interest rates, it’s going to look a lot like an illness-inducing ride at a circus or at a funhouse because we will see interest rates drop. But knowing Louis’ work, I think looking out beyond maybe not next year, but a year from then, we may see a sickening rise as well. And so it is, I think, just for all of us listening, important to say that, we’ll see—I don’t know that anyone disputes the path down in the near-term, but I think from 24 months on, there is a lot more room to maneuver in different directions.

MARK: I don’t know, yeah, I think we are going lower for longer. So we’ll come back to that later.

KAREN: David, you have been an expert at seeking shelter in the storm in the equities market where Mark was just saying we’re all a little puzzled right now. What is your view on what people should be thinking about that they might not have in light of that?

DAVID: Sure, I’m not sure that I would consider the things that we’re looking at to be shelter in the storm in an absolute basis, but I think relatively speaking, the cash flow–generated investments from companies with stable balance sheets and less leveraged balance sheets represent a relative improvement to some of the risk levels that may be out there for those of us that are in the long side of the equity market.

• Though I agree a 100% with what Louis said in terms of the construct of a year from now—looking back to oil, dollar, and interest rates as the three major categories—but I don’t know if I agree that it’s contrarian to say that oil would be higher a year from now, particularly if you’re using 20 as the baseline.
• I think he’s exactly right as to where oil will be, but I think that seems to be the more majority view. And with interest rates, when Mark talks about dramatically lower than where they are, he must mean negative as he clarified because we are too close to zero now to not be negative if it’s dramatic. And I really can’t tell if I disagree only because I want him to be wrong, or I really do believe he’s wrong? I would vehemently hope that as it pertains to US monetary policy, the Fed will be the only major Central Bank that holds the line against the disaster of negative interest rates.
• The reason why I’m reasonably optimistic that I’m right and Mark is wrong on this is I think our Central Bank values our actual banks more than they do in Europe and Japan. But in terms of a year from now, when we’re in Arizona, I do believe that dividend- sustaining companies are going to prove to have been one of the great bright spots not only in the bounce back out of COVID but in the ongoing volatility that we’re sure to see as we climb through and eventually out of recession. And so that would be the perspective we hold and think will stick with us through next year.

KAREN: Thank you. John, as a host, I’m going to make your question just a little bit harder. This is the advantage of being distant and there is no price to pay for that. You’ve been doing these conferences for a long time and you’ve had the privilege of seeing through the time series data on what sticks and what doesn’t. When you look back over the last week, what jumped out to you as something that you think is under appreciated that you just want to give a chance to put light on again as we wrap up?

JOHN: When I look at the various presentations, I mean, going from, you know, darkly bearish to, you know, positive and bullish forward, I feel like I’m being whipsawed a little bit. It makes me think that, number one, you know, forget the V shape and L shape. We’re limited by an alphabet. What we are really going to have is a rocky mountain recovery.

• You’re in the flatlands of Colorado, you’re driving up and here are the Rockies in front of you, especially when you get in them, and there is this long huge row of mountains, peak, valley, peak, peak, peak, peak, valley, and I think one of the things—we tend to see the market as we think of the market.
• We tend to think of the economy. No, wrong way to think it. We’re going to have different segments. Some segments of the economy are going to do extraordinarily well in this, some are really going to get creamed and others are going to do okay and it’s—we are really going to have to learn to focus on, just as David does or Mark does, where they look at, Louis especially, your rifle shot companies, your rifle shot countries.
• Well, we’re going to be needing to think more about what is this business going to do? What is its environment? I don’t want to be long restaurants in general, but I want to be long entrepreneurs in the restaurant business because they’re going to figure it out the survivors because there are going to be a lot of restaurants that go under. And that’s not good for restaurant workers, but the survivors are going to take that reduced share of people going to restaurants—because I think there will be a reduced share—and they are going to split those up and they are going to do just fine.
• Other entrepreneurs, other businesses are going to have to adjust, so I think one of the things we need to do when we are going to look back, yes, the total economy will be less than it was in July of 2020, I don’t think we’re going to recover that fast, but we will be recovering in various segments and doing well.
• The second thing that I don’t think people really have factored in is the incredible number of shots on goal that we are getting in the vaccine world. Peter Diamandis was talking about this, Michael Roizen and the panel talked about it, others have, I mean it’s a hundred shots on goal with vaccines.
• We are going to end up with multiple vaccines, maybe we end up taking a cocktail, we just don’t know yet, but I think by May, when we gather next year, we’re going to be surprised at how fast we roll out and how ubiquitous the vaccine becomes and that’s going to change things. It’s going to make people’s participation levels change.
• Now, we may have changed our habits, I kind of like eating in more, it’s fun to order in and eat—not have to go out and get dressed up, so habits may change, but the desire to go out and mingle and do things, I mean, I’m talking with Mike Roizen and others.
• There’s a new technology that looks promising, that will absolutely make it okay to have mass sports again and mass events and so that we’ll feel safe gathering in some hotel in the future. I mean, I don’t think that we understand just how much this has fast- forwarded the human ingenuity and fast-forwarded entrepreneurship. I’m really excited about that and I think people are kind of waking up and going, wait a minute, the government didn’t stop us and we have pushed against the government.
• I mean, say what you want about Elon Musk but he said, “No. You want me to be in this place? You are going to let me open up.” I like that. Now, good, bad or indifferent, I’m not asking you to invest, but I think more and more employees… I mean, I am watching the Boston restaurateur, he said, “Twenty-five years I have had my business, get out of my face.”
• That kind of spirit is what I am bullish on and I think we’re going to see that all through the economy and so, taken further out two to three years, four years, yeah I am bullish on humanity. And I think this has been a real pull back on the nanny state of government, the FDA, and the CDC saying, “Well, you can’t do this,” or “We want you to do this. We want an approval on this.” I mean, when they don’t want to send you a home test kit because you are not a professional and you are not allowed to see your own results, I’m sorry that is too much. It’s my results. I want to see what is going on.
• So, I think there is going to be more pushback on that and I think that is bullish for everybody and I think when we come together next in May, we are going to look back and we are going to go, wow, this kind of jump started entrepreneurship.

KAREN: Well, that’s interesting, John.

JOHN: Thank you, David. I appreciate the applause across the room.

KAREN: I hope you are right and your friend, Neil Howe, would say that the millennials are loving having the nanny state help them out with their test kits and holding their hands and making them feel loved and snuggly and it’s only crusty boomers who reject the loving hand of government reaching in and helping them out. What’s the—how do you think that the different generations and opening it up to the rest of the room, do you think internationally we will see a different attitude here? Are the Chinese going to find their entrepreneurial edge while we cozy up under our government security blanket or what’s, is Neil just wrong about us being in a Fourth Turning?

LOUIS: I’ll have a crack at it.

• Look, I hope with every fiber of my being that John is right.
• My fear is that, actually, if you’re a small entrepreneur, your lesson in this crisis is that the government can pull the rug from under your feet at any moment and can basically shutter your business, and that you’re better off working either for the government itself or for a big business that ends up getting the big government bailouts.
• And so while I want to believe, and I really pray that John is right, I think history tends to show that after big crises, after wars—and everybody has been saying that we’re on this war against COVID—you got a bigger weight of governments not a smaller weight of government in economies.
• So when we meet again in a year’s time, I think you will be hard-pressed to find, unfortunately, an economy where the government doesn’t have a much bigger weight than it did before this.
• And again, I sure hope John is right and that I’m wrong, but, you know, I think what you are going to end up with is much more government interference in a number of sectors. Take healthcare—

JOHN: Let me jump in and say, I agree with you on that Louis, I really do, but that’s different than the pushback that we’ve seen on government micro regulation. I think the macro regulation all of that, absolutely going to be there.

• Karen, you’re right, we’re going to be seeing more, the millennials are comfortable with, you know, the nanny state, if you will, but they still want to have access to the data, they still want to be able to go out and do their thing within that tent. And I think maybe we have unleashed a little bit of an entrepreneurial, you know, “let’s do some pushback,” so I don’t know.

MARK: I’m going to take the other side, John.

• Look, I think on a micro-level, you’re absolutely right and look the entrepreneurial spirit, it’s what America is all about. And on a micro-level, there will be plenty of people who come out of the wreckage and create amazing things, you know, because some of the best, actually, many of the best, maybe all of the best investments I have ever made my career came in the teeth of downturns. Right?
• We invested in JetBlue airlines in 2001 in the teeth of a recession, made 10 times our money. You couldn’t start an airline. Well, of course, you could start an airline, you could actually start a really good airline. Did the same thing with Azul, you know, same model down in Brazil a few years later, after the global financial crisis.
• So I think the problem is, to Karen’s question, this idea that America somehow is going to take back this lead that we squandered against China. We talked about it in the number of panels over the course of last week. You know, China is playing a different game. They’re playing Go and America is arguing how to set up the checkerboard and we are falling further behind.
• This massive power grab by the central government is not going to be gone by next May. I’m with Louis.
• It’s going to be way worse and way more restricted and while there will be individual stories of success, fantastic. As a country, we are going to fall further and further behind as we have for the past decade.
• While, quietly, China is focusing on 5G and AI, we’re focusing on being awesome in social media. So we rocket Instagram and Facebook, but, you know, I don’t see it.
• China is spending more money on entrepreneurship and entrepreneurship zones, they graduate 5 million engineers every year, we do 500,000 and that’s going to change with all the crackdown on college here, so I clearly can take the other side of that.

KAREN: Go ahead.

DAVID: Can I just jump in real quick. I think it’s entirely possible that what everyone is saying can be true at the same time, but particularly Louis’s point that he worries about an entrepreneur saying, “I’m not motivated to go take the risk in my restaurant, I see the bailouts in the airlines, I’d rather be in a space like that.” I don’t agree with that. I don’t believe that what John’s referring to about the entrepreneurial spirit is being undermined by the heavier hand of government.

• I think that this is a sense—in this sense, different than 2008, where the financial crisis was largely presented to the society as a story of good guys being Main Street and bad guys being Wall Street and many people felt that the bad guys won out and I think that narrative was really wrong and inaccurate then, but in this case, that’s not even the narrative.
• There’s far more sensitivity even in this CARES Act, and it has all kinds of problems in terms of its deficit implications, no doubt, but it wasn’t written in a way that anyone would say, “Wow, this really favored Boeing,” or “this really favored United Airlines.” It’s a reasonably populist act in an odd sort of way.
• The debate now is over whether we are going to keep giving $600 a week to people to not work. The debate is over the money that has no multiplier effect, it was just injected straight to taxpayers with this $3,400 a family, that Pelosi wants to do again.
• So I don’t think that we’re going to end up out of this having that conflict re-poked. I think that Mark’s point regarding competition with China is very legitimate, very different. The only thing is, the barb I guess I would add is, if it is true, our university system is going to get tweaked out of this, I think that is going to help our cause, not hurt it, but I digress.
• Ultimately, Louis’s reference to macro problems out of the enhanced deficit spending of government, the complete monetary insanity that existed pre-COVID, John has been writing about this stuff for years. Japan has been acting like Japan for decades. This is not new, other than all of a sudden, we added some commas and zeros to it in about three weeks in the United States, but I think that those macro factors, our intention with the micro realities of the American spirit that is very difficult for me to ever go short the American entrepreneur.

KAREN: Alright, David, let me pick up on something that you and—

JOHN: Let me just jump in, Karen. Karen, give me 30 seconds here.

KAREN: Sure.

JOHN: Mark, on push back. I don’t think it makes any difference. Denmark doesn’t care how big Germany is. China is going to be two to three times bigger. They have got 1.3 billion people. They should be bigger than we are. So, it makes no difference if they are a bigger economy, if they’ve got more mass. I mean, what we have to worry about is: how do we make ourselves better?

Now, will government be bigger? Unfortunately, yes. Will it cost more? Unfortunately, yes. But there’s—just as I can go into Denmark and with the big government footprint and find lots of opportunities, just as many Danes do, we’re going to find it here.

Now, that doesn’t make the massive deficits, the massive debt—all of these are the things which are going to have to be, you know, rationalized and consolidated and reset in the future—it doesn’t make that go away. But it doesn’t make me want to pull my horns in and, you know, try to find that cabin in Colorado or in Puerto Rico.

MARK: You already did that.

KAREN: John, I’m really glad you just said that. I’m going to herd you cats for one second because there is something that I’ve been hearing over the last week and a half that has left me puzzled with the contradiction and I hope you all can clear it up for me.

• On the one hand on this panel, we have got the folks who are, I think, rightfully, very optimistic about US entrepreneurialism. Mark, you have talked eloquently and extensively about tech and its importance and disruptiveness and the critical nature of investing behind it. And, Louis, you and Mark are both telling us we should go buy Chinese long bonds. And at the same time, we’ve got this emerging tech war happening that says, “Okay we’ve got investors listening to us now over 70 countries who are trying to figure out where to go long and where to put their money.”
• Does the tech war change the nature of how you think about investing in China versus the United States? Will a digital divide give, actually, more to John’s point about scale and creating two different winners in each one of these tech categories? And how do I reconcile that with buying long bonds left, right, and center? Help me out here, guys.

LOUIS: Karen, you should have put a coin in that machine, because I wrote a whole book on this, so I’m going to have to really curtail myself to—

MARK: I’ll cede my time to the gentleman from Hong Kong.

KAREN: He’s in Canada now. He’s a pacifist.

LOUIS: So, look, the first thing is, of course, the tech war is very, very important. In fact, I would go one step further. If there’s one major thing that differentiates the current crisis to the 2008 crisis is the 2008 crisis actually triggered an acceleration in globalization on two fronts.

• The 2008 crisis led to the creation of the G20. The reaction of policymakers everywhere was, “We’re all in this together, let’s get together and sing Kumbaya,” and that was the first reaction.
• The second reaction was China went on an infrastructure spending binge such as the world has never seen, building roads, highways, airports, etc., which basically brought 500 million Chinese workers from the boondocks into the global economy and so, you know, before 2008, if you produced in China, it basically meant you’re producing in Shenzhen or in Shanghai. After 2008, producing in China meant it could be producing in Zhongzhou, Chongqing, or Wuhan.

Now, all of a sudden, we’re realizing producing in Wuhan comes with costs that we really didn’t factor in, and maybe it wasn’t such a good idea after all.

• And so now, while 2008 was really the crisis that led to the acceleration of globalization, 2020 is the crisis that leads to the rejection of globalization.
• And to the world breaking apart into three separate economic zones, each with their own trading currency, each with their own reference bond markets.
• And indeed to your point, increasingly, each will have to have their own supply lines—most importantly, their own tech supply lines.

And this is where I think things can get very dicey because there is probably no more globally integrated sector than tech.

• If you take your iPhone, you’ve got components in there from 21 different countries.
• If, all of a sudden, we have to take apart that iPhone and say you do this, I do that, and we never talk to each other again, the potential for dislocation is massive. And so my big fear on tech today is very simple.
• The US has basically chosen tech as the battlefield to fight China because the US has a massive comparative advantage on tech. So it’s chosen, we are going to fight China, and this will be the battlefield.

My dad originally is from Alsace, in France. As all of you lovers of history know, we fought three wars over Alsace, 1870, 1914, and 1940 and you know what, owning real estate in Alsace was not a good idea. Either when the German troops came marching in or the French troops came marching back or the German troops came marching in again or the American troops back again, it got trampled and trampled and destroyed.

• Today, Alsace is no longer the battlefield. Tech is now the battlefield. Now, tech it’s a terrific story, there’s a lot to say for it, etc., but the fact that it is now the new battlefield should make us very wary of investing there and within tech, I think you want to be very careful of what you own within tech. Is it a part of tech that is going to be the battlefield—in which case it’s dangerous to own—or is it a part of tech that isn’t going tobe the battlefield and then you can own that safely?
• The obvious battlefield within tech is semiconductors. So now you have got China saying we are going to spend $1.5 trillion building our own semiconductor industry. Now, we can debate whether they’re going to achieve it or not—to Mark’s point, what China can do is throw money and men at this. They’re graduating 5 million engineers a year. Do you want to own a business that is now going to compete against somebody that has unlimited manpower and unlimited capital? I don’t want to, like, do that.
• That to me seems like fighting the German army. And even if you win in the end, you are going to take some serious bruises.
• So the tech war is very important and should be one of the big definitions of how you look at your portfolios.

MARK: I couldn’t agree more, and I think that the cold war 2.0 rhetoric that’s coming out of DC is some of the dumbest rhetoric that has come out of DC and that is a big standard. A lot of dumb rhetoric comes out of DC.

• This bill that was passed last night to try to force Chinese companies to de-list in the US, idiotic. I mean, beyond idiotic. I’ll probably get thrown off the podcast for what it really is—it’s f-ing idiotic.
• It’s so dumb and it’s going to be bad for America. It’s going to be bad for our competitiveness in the future. It’s going to be bad for our ability to grow. It probably is going to cost us points on GDP growth going forward.

You know, collaboration and globalization have always been the right answer, and, you know, I’ve been talking about this for a long time, right?

• Tariff man is just as stupid, if not more stupid than Hawley and Smoot in 1930, and we are on the verge—we are in April 1930, May 1930, and we have a choice.
• We can either push a garden-variety recession into the Great Depression or we cannot, and everything we’re doing right now in Washington is pushing us into that greater depression. Now, it doesn’t have to go there, but that’s the way we are going.

KAREN: John, anything to add to that?

JOHN: I’m going to let David have this first.

DAVID: Yes, that’s a good idea, John, save the best for last. I am, like Mark, a big fan of globalization and find it impossible to understate the economic benefits to the modern economy that globalization has represented and that includes, in this very specific context, in technology.

I don’t feel the same panic that he is describing around the present jawboning in Washington because I don’t take any of it seriously at all.

• I don’t believe that they’ll do any of it and so when they bark about it, it is difficult to get really riled up because I think you’re going to end up with more trade with China. It will be different.
• And I’m very conscientious of the fact that there will be different distribution around pharmaceutical, around national security infrastructure, and that perhaps soybeans will just continue to be the source of our targets till kingdom come, but the notion that we are actually looking at the things that get jawboned about on Fox News is totally disconnected from the first four years of this President’s administration.
• And much like a lot of the left’s concerns about POTUS’ supposed friendliness with Putin, it would be really difficult for me to comprehend policies that were less friendly to Russia than the ones that were enacted over the first several years of his first term.

So it’s true of all Presidents, but in this particular dynamic that Mark’s referring to around globalization, I don’t think that the forces of globalization are going to be enhanced or shrunk by anything that President Trump tweets. I think that the ultimate policy currents are facing a legitimate alteration in globalization that is not anti-globalization. It is, perhaps, an optimization of globalization which I think many actors in the world will end up embracing.

JOHN: Let me see if I can square that circle while trying to agree with everyone. First off, as numbers of people, yourself, Karen, talked about, I think that COVID-19 has pulled forward a lot of trends that were already happening.

We were already moving to where we were locally producing products for our own manufacturing. The whole robotic movement, the whole AI movement, the whole 3D printing movement, that was already happening.

• Now, we are going to be accelerating. We’re going to, for good reason, bring a lot of our pharmaceuticals back because we have said maybe it’s a bad idea to have, you know, 95% of the test swabs in the country that we use in the world come from two factories in Italy that are few miles apart from each other. Maybe we want to change that, so not even just picking on China. It’s like, people start having to look at the logistics of where is this stuff sourced, and that’s not against globalization. That’s just supply chain.
• And I think we were accelerating that whole supply chain, and now we are beginning to look at what is the total potential cost.
• Going along with Mark, I think tariffs and I have been out on this since the beginning. Tariffs are just a bad idea. It makes me think of Smoot-Hawley. I just can’t, it makes me sigh every time I think about it.
  

MARK: But remember, China’s paying for them, John.

JOHN: You’re right.

MARK: And the wall, too.

JOHN: And the wall, too. I mean and Mexico is paying for the wall. I find it difficult to believe that we are going to do anything too irrational. I mean, asking companies to de- list. That’s just hurting American investors and our opportunities.

• At some point, when you keep doing things like this, there will be somebody else that comes in because most of us have lived through enough cycles now that we know that we are not going back to the 1930s where the Democrats get in and they stay in for 30 to 40 years.
• My longer-term picture is still that we’re going to have to deal with a lot of the problems of debt and dislocation, we’re going to have to deal with the problems of jobs, and the job dynamic of people losing jobs over here that they don’t have the skills to do for the jobs that are appearing over here and how do we bridge that gap?
• Those are the things that I think that are far more important than worrying about some of the logistics of the tech war.

LOUIS: Can I just add something on to that, Karen, very briefly just 10 seconds?

• Look I think we all agree that, you know, coming out of this, it’s fairly obvious everybody has a lot more debt. The question then becomes do we move towards a more integrated world, or do we move towards a world where, maybe not—border walls go up, but at the very least, you have some level of globalization, and everybody basically pulling the covers back onto themselves.
• I’m of the belief that we move to a world that’s more de-globalized and where everyone’s pulling the covers back onto themselves.

Then the question becomes as you look at this debt picture that is blowing up, if you cut yourself off from the rest of the world, that also means that foreigners are more likely less enthused at the idea of funding your debt, and so you really have—when you look around the world, you have two types of countries.

• You have the types of countries that have a lot of debt and that debt is all self-funded—those are mostly the countries in Asia, Japan, Korea, China, etc. You look at China’s debt. You know how many people own Chinese debt, in China a lot, but outside of China, nobody.
  • If we live in a globalized world with, you know, ever-bigger flows, ever-greater integration, then foreigners will be happy to fund everybody else’s debt.So you have the countries where their debt is self-funded, and then you have the countries where the debt is funded by foreigners that rely on the kindness of strangers. Now, if the global trend—excuse my French, but—is to increasingly show the middle finger to offset foreigners, how likely is it that the same foreigners say, “Yes, yes, yes, very good, here is my money. I’m going to keep funding your debt,” and for me that is the big question.
  • Otherwise, you are going to be dependent on your own to fund your debts and this will happen: either your private savers fund your debts—and that is an increase in the saving rate–or your Central Bank funds your debts—and that is a collapse in your currency. It’s pretty obvious to me which way the United States is going.

JOHN: Wait a minute, Louis, that didn’t happen for Japan. It did not happen for Japan. Their Central Bank funded 150 percent of their debt and it did not collapse their currency.

MARK: You know, it’s like the old joke about the innkeeper in Europe, right? He comes in, this traveler comes and he wants to get a room at the inn. The innkeeper says give me a 500 euro note. He lays it on the table, goes up to look at the room.

• The innkeeper takes the note, runs out the back door, pays off his debt to the butcher. He takes the money and pays off to the farmer. He takes it to the house of ill repute, pays off his debt. She takes, it runs back to the innkeeper, puts the note back on the table. The guy comes downstairs, didn’t like the room, picks up his money and the whole town’s debts have been wiped out. No money changed hands—that’s Japan. They own it all. That’s China, they own it all.
• America, we actually, we’re talking about reneging or canceling selectively China’s debt as a punishment for COVID.

JOHN: It won’t happen. We can talk all the nonsense we want.

DAVID: When you say we’re talking about that, who is seriously talking about that?

MARK: Lindsey Graham.

DAVID: An elected official on a Fox News show.

JOHN: He said, “serious,” okay? Lindsey Graham is not serious.

MARK: Lindsey Graham is a senator in charge of a big committee, right?

DAVID: But my point being that he’s one of 100 lawmakers who has an audience he’s appealing to, but there’s no real movement in the United States towards canceling Chinese debt.

MARK: I mean, Lighthizer talks about it. Trump talks about it.

KAREN: So is this the end of the dollar as the reserve currency? Is this the shotgun for the dollar losing its share?

MARK: 2030 is the end.

KAREN: 2030, we’re gonna own, are we all going to own digital renminbi or what is going to be the alternative to that?

LOUIS: Look, I look at reserve currencies like a computer system. Today, most of us use Microsoft because everybody else uses Microsoft and so we can exchange files, etc., and I hire a new guy, you know, he walks into the office and he has got his PC and there’s Microsoft on it and he knows all the programs and off we go.

• And so to establish a parallel operating system is very, very tough. You don’t need to be as good as Microsoft. Frankly, you need to be better for people to want to change the system.
• And today, you know, it’s very hard to argue that anybody is better than the US dollar if the US dollar is the Microsoft in the system.

But nonetheless, what we did see in the previous, you know, 20 years is for certain industries, Apple turned out to be better than Microsoft, and so if you are an architect, if you work in graphic design, if you work in journalism, typically you use Apple, not Microsoft.

• If you work in finance, you use Microsoft, and I think it could be the same in that it’s going to be increasingly true for different regions of the world.
• So, you know, the US dollar was the end-all/be-all just like Microsoft used to be the end-all/be-all. But, increasingly, if you are sitting in Asia, maybe trading in renminbi makes more sense than trading in US dollars, just like using Apple if you’re an architect makes more sense than using Microsoft.
• And so that’s the path that we are on and it goes back to the question you were asking earlier of why buy Chinese bonds.
• If we move to a world with really three major economic zones, you know, one centered around China, one centered around Europe, one centered around the US, each with their own reserve currency, US dollar, euro, renminbi, each with their own reference bond markets, then it’s pretty obvious to me that out of all these bond markets the one that is completely mispriced is the Chinese bond market because there you’re actually still getting a yield, and the currency is undervalued.
• And to John’s point about Japan went from 30 percent debt to 150, and, yes, the currency never fell because it was funded internally. It never relied on foreigners. That’s why the whole idea that Japan was going to default was silly, to begin with.

JOHN: Okay. Let me first of all—

LOUIS: Hold on let me just finish—two seconds.

JOHN: I just want to ask you a question. What percentage—

LOUIS: You only default on debt when your debt is held by foreigners. Otherwise you’re defaulting on yourself. It’s stupid. But when the majority of your debt is held by foreigners like in Greece or Argentina, then it makes all the sense in the world to default and stick it to foreigners.

• Now to your point, Karen, I don’t think the US dollar loses this reserve currency status without the US defaulting on its debt, and given that the US can print all it wants, there is no reason it should default.
• But the question is in what currency do you end up getting paid? If it’s the US dollar continues to collapse in value, then it becomes increasingly unlikely that foreigners will want to participate in this. And I think that’s the big trend over the next 10 years is foreigners will decide, you know what, the US dollar is heading down, it’s heading much lower and I’m not really that keen to own it.

KAREN: John, what did you want to ask?

JOHN: Louis, let me ask a quick question to everybody because I don’t know the answer. What percentage of the US $25 trillion debt is owned by foreigners?

MARK: A lot less than it was 10 years ago.

JOHN: That’s it. I don’t think it’s that much, percentage-wise. I don’t think it’s that much.

DAVID: We, sort of, beg the question, John, because it’s so much Federal Reserve–held now. The Central Bank holdings are so categorically different, but I mean—Louis, you could answer better than I. I think that the percentage of debt held by Japan is much lower. The percentage held by China has not increased as much when you look at our debt ex-central bank holdings. But our debt versus competitive debt from other developed nations is more foreign-held than they are. I think that would be the point that Louis was making.

MARK: It’s about 30 percent, John.

JOHN: Yes.

LOUIS: So yeah, it’s not critical yet, by any stretch which is why the US dollar is the reserve currency, but it’s, you know, increasingly, what you’re seeing is as the debt starts to go through the roof, the only marginal buyer is the US Federal Reserve at this point.

MARK: The real problem is the amount.

LOUIS: Yeah, and that’s massive.

MARK: Last month we had to issue three trillion with a “T.” Remember one trillion is a dollar every second for 31,710 years. So we did it three of those babies just last month and the projections over the next 18 months, given the crazy MMT spending that we are doing, is $21 trillion over the next 18 months. Who’s going to buy it?

• The bond market flipped out, you know. We lost 25 basis points in a matter of hours on the day we tried to float three trillion and it’s stabilized again but, you know, a friend of mine a month ago—remember the day that the Fed cut to zero, Sunday night—she texted me and said, “Hey, you still awake? I’m, like, “Of course I’m awake, I’m doing Twitter.” And she said, “Can you talk?” And I’m, like, “Sure.” And she was freaking out.
• She was panicked. She said the bond market just broke. “What do you mean the bond market just—” She said, “The Treasury market just broke.” And that was the day it went from, the 30-year was like 89 basis points and it went to 170 literally overnight.
• Fed had to cut to zero that evening and it settled back down, but she said, “Look, it was broken.”And part of it was this rumor about the US government selectively defaulting on Chinese debt which, again, that would end financial services as we know it. I mean the global financial system would collapse if the risk-free asset certainly has risk.
• So I’m with you, David. I hope no one intelligent is actually talking about it because if it actually were to even be threatened, the devastation that that would cause to the global financial system is really unfathomable, so crazy stuff.

KAREN: We have five minutes and, Mark, what you just said reminded me of a wonderful quote from Richard Fisher, the ex-president of the Dallas Fed who always describes the US economy as the prettiest horse in the glue factory. The third-place winner in that beauty contest is Europe. And while we were sleeping here in the US, this week we saw Merkel and Macron come forward and say hand-in-hand they’re going to hand out 500 billion in euro and largesse to the weaker nations and then had Austria and the Netherlands say, “Eh, hand out and maybe let them borrow for a little while.”

• Is this the moment where Europe finally starts to share the contents of its refrigerator or are they just going to keep being roommates under the same roof, what’s the progress this year?

MARK: Well-described. Well-described.

JOHN: I’m going to steal that.

KAREN: But you’re going to answer it first, right?

MARK: I don’t do short, but, actually, I will give you a short answer.

Look, I think Europe, Japan, the US, and China are locked in this rotating hot box. So each year, somebody has to have the strong currency while the others can devalue in the race to the bottom and I think, you know, Europe’s turn is coming to be a stronger currency, and I think that’s where they’re headed for the short time. So I think they’re going to have to share the refrigerator.

LOUIS: I think we are at a very important crossroad and, you know, everybody knows that the way the euro is constructed doesn’t work structurally and that you need some level of fiscal union and fiscal unity to make Europe investable again.

• While there’s still this sword of Damocles over Europe’s head, nobody can, you know—it’s basically not a safe place for capital.
• And yes, to your point, you know, Macron and Merkel came out with a plan that basically allows Europe—grants Europe an additional 500 million in taxable revenues and more importantly grants the European Union the ability to impose its own taxes and thus have its own source of revenue, taxes on carbon, taxes on digital.
• So, great news. We’re going to have new taxes in Europe because, you know, that’s one of the things we were lacking. So we can rejoice there. That should solve all our problems. Clémenceau used to say, “France is a very fertile country, you plant civil servants and very soon you grow taxes.”

So we will have new taxes to fund all this, but the big hurdle is basically before the end of the month, you have four countries that might put a blockade, Finland, Austria, Holland, and Sweden.

• If they put a blockade, I think it’s basically—it could be the end of the euro. Because at that point Italy says, “Well, there’s no—at times there’s no European solidarity. I’m out.”
• And, frankly, Italy really, at this point has very little to lose in leaving. You know, the whole fear of leaving was you leave, you end up with catastrophe on your economy. But when your GDP is already down 30 percent, you know, what’s another five between friends? At this point, it doesn’t matter. If your economy is already in lockdown then you might as well, you know, bite the bullet now.

So I think we’re at the very important crossroad where, in the next week, either this plan goes through—and then to Mark’s point I think the euro rallies and, frankly, if it goes through, you want to buy European financials because they’re going to double overnight. That is option one.

• Option two: one of those four countries puts a veto and then we have another big wave of European crises. It’s a hell of a crossroad. We’re going to know in the next few weeks. It’s really a game of heads, I win, tails, I lose, which is, you know, not a great game if you’re an investor. So it’s probably better to just watch, and then once you get it into your act, you leave the initial rally to somebody else.

MARK: But we have a hint, Louis, we have a hint. Look at the price of Deutsche Bank in the last month, it has almost doubled. It’s broadcasting and telling us what’s going to happen. They’re not going to let the National Bank of Germany fail.

• And you are spot on that this is coming, and those European financials—even though they’re horrible businesses in a ZERP and NERP World. It could be pretty good trades.

KAREN: Hey, can we let John have the last word here, just to sum up?

• This has been a whirlwind ride of the final panel, but lots of room for optimism on the US entrepreneur, on opportunities in China, and some of it in tech and Bitcoin markets.

So, John where do you want to leave us? Where do you want to land this plane?

JOHN: Delicately.

KAREN: And the passengers thank you.

JOHN: I think one of the things we’ve seen is, to borrow Louis’s point, we are at a crossroads. We are in a position. We’ve been seeing it from the response of our own readers and from my friends, we are all looking for information now, because this is, in Texas we would say, “We’re all calves at a new gate.”

• We are coming up to a gate we have never seen, and we don’t know how to go through it. We can see green grass over there, but we’re not sure.
• I think cautious, delicate, you know. There are going to be some times to make some big bets. So there’s going to be some monster opportunities. There probably are now, depending upon your capacity for risk and so forth, but I think we’re going to know more in 60–90 days.
• We are going to start getting some feedback on the vaccines, we’re going to start getting some feedback on what happens as we open up.

So far, the data that I have seen the last two days opening up doesn’t seem to be a monster increase, but it’s in the summer, it shouldn’t be the monster increase.

• What we’ve heard is a range of views for this entire conference, most trending towards the, “we’re not going to come back,” and I think Bianco’s point is that 90 percent isn’t good enough, 90 percent is still down 10 percent. Now 90 percent from where we are today is a huge bump up. That’s a great ride back up and it’s going to be a really great ride for specific companies.
• So as investors, we need to think about what do we need to do in the future? We have got to look at our own personal portfolios, do we need income, do we need growth, and we’ve heard lots of opportunities about both of those, this year.
• We’ve seen lots of opportunities and problems with the geopolitical world. There are tons of opportunities in tech. I can’t wait to spend an afternoon going through Mark Yusko’s deck without having him talk into my ear and trying to flash them every five seconds before I get to see it.
• David Bahnsen, thank you.
• Louis, you have been a pillar for this entire conference. I’m looking everybody in the eye here now on my screen.
• Ed, you have been a master at hosting this conference. I’m getting so many people e- mailing—you, yeah, you are getting an applause from the audience.
• I mean, really, this is the best conference that I have ever had the privilege of being associated with, what an incredible faculty. Thanks to the guys backstage for pulling this together, really you don’t understand how difficult and new—I mean, we’re cutting some new technology here putting things together that hasn’t been done before, to be able to bring thousands of people, so many countries to flip it. We’ve learned a lot of lessons.
  I’m hoping we are going to be in a physical space next year. I believe that, but I also think we are going to integrate the remote more into our lives. That’s something, just like we’ve learned that we like eating at home, we are going to learn that we like this remote experience and we like being able to pull people in more.
• Thank you for joining us, my thousands of closest friends, and more to come. I appreciate you so very, very much. Your attention is the most valuable thing that we can ever have.

ED: Great ending words, John. Thank you, Mark, Louis, Karen, David, you guys gave us so much of your time. Thank you so much. We really do appreciate it.

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