WBD509 Audio Transcription
The Crisis of Inflation with Lyn Alden
Release date: Friday 3rd June
Note: the following is a transcription of my interview with Lyn Alden. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Lyn Alden is a macroeconomist and investment strategist. In this interview, we discuss the macro environment. We zero in on the current inflationary crisis, focusing on the demand/supply problems with energy, prospects for recession, and the impact on markets and countries.
“I think we’re going through a quote-unquote ‘fourth turning,’ so a time period where we’re examining our existing institutions. We’re decreasing our level of trust in them, whether it’s governments, whether it’s media, whether it’s corporations… basically the things that have been built over the past 50-100 years, and wanting to build new institutions. And that transition is always very messy.”
— Lyn Alden
Interview Transcription
Peter McCormack: Lyn, hi, how are you?
Lyn Alden: Good, how are you?
Peter McCormack: Good. Sad to have missed out on coming to Norway with you and the rest of the bitcoiners.
Lyn Alden: It was a nice trip.
Peter McCormack: Yeah, it's the first one I've missed for a few years; I had some other things I had to get on with in London. What did I miss; tell me what I missed?
Lyn Alden: So, most of the conference focused on human rights, no it's not a Bitcoin thing, it's mainly a human rights thing, but they're increasingly recognising Bitcoin as a tool that can be used, just like any other tool. So for example, VPNs can be used if you want to receive and transmit information in a hostile network environment, and Bitcoin can be used to receive and transmit value in a hostile financial environment. So, they've been increasingly using that, especially Alex Gladstein.
So, they had a number of panels there where they were interviewing people from Africa, from Venezuela, from a bunch of regions around the world where they've had their bank accounts frozen, they've had high inflation, and just how people are using that as a tool. Then they also had panels basically on Lightning and energy to discuss some of the other aspects, maybe not directly tied to human rights, but that are involved in either scaling it to people, or about the costs of having this technology exist.
Peter McCormack: And, did it have a profound impact on you going and seeing and hearing these talks?
Lyn Alden: I think so, yeah, especially when you compare it to the World Economic Forum that was going on. That's where a lot of altcoiners were going. But Bitcoin and stablecoin people were at the Oslo Forum, and basically one is real-world tools and things like that, and one's more Wall Street-like; so, it's utility versus more investing in speculation. So, I think that's the most important angle of the whole thing; that's going back to the roots of why Satoshi made this whole thing. He didn't talk about, "Hey, guys, we're all going to get rich". He's like, "Here's this private, peer-to-peer type of money". So, this goes back to those roots.
Peter McCormack: A big shoutout to Alex Gladstein for everything he's done there. I know you're a massive fan of the Human Rights Foundation.
Lyn Alden: Yeah.
Peter McCormack: Yeah, I've always found it's a really good grounding exercise, because we're about to talk about the macroeconomic environment, and I know a lot of your work is focused on that side of things, and we discuss price, and when Bitcoin's going up everyone's happy, and when it's going down people aren't so happy. But there is this whole other utility side, where you realise this is a central tool for people outside of whatever the price of Bitcoin is.
Lyn Alden: Yeah. At the end of the day, what we're watching is this network monetising over time. If you look at the Chainalysis Crypto Adoption Index, it's Bitcoin but it's stablecoins, it's all of crypto; 19 out of their top 20 countries are developing countries, and the one outlier is the United States, because we're weird. So basically, it's not surprising that places where you either have arbitrary bank freezes, or persistent inflation problems, they're more likely to use these alternative monies and these peer-to-peer cryptographic monies.
It's one of those things; some of them use Bitcoin, some of them use stablecoins, but then there's also a lot of scams in the whole space too, so it's why education is so important. But basically, this goes back to the roots of why this technology was invented in the first place.
Peter McCormack: Yeah, and it's quite interesting that you said Bitcoin and stablecoins; this is something Alex talks about a lot. He talks about the fact that in certain jurisdictions, stablecoins are super-important. When people are struggling with economic difficulty, Bitcoin isn't always the greatest tool for them, because the price is volatile. So in certain jurisdictions, I think he's mentioned Palestine to me specifically, maybe even Turkey recently, he said there's a lot of popularity with regard to stablecoins.
For me, it gets into this weird place whereby I'm a bitcoiner, but I absolutely support and agree with everything Alex says about stablecoins. But then, I have to square this circle around the protocols which they tend to live on, which tends to be shitcoin protocols, which we can all be very critical of. You've done some great studies on Ethereum and potential issues with scaling that as a platform; but at the same time, if that is a tool that is becoming a tool for human rights and freedom, I'm kind of conflicted between criticising these platforms and saying shitcoin all the time, and recognising they are actually helping people. Do you understand the conflict I have?
Lyn Alden: Yeah. I mean, at the end of the day, there are people making use of stablecoins. So, one of the big markets is just crypto trading, so that's where a lot of the Ethereum ones are used. The ones that go on Tron are optimising for lower fees, and they're the ones that a lot of people in developing countries are actually using as dollars, they're using them for savings, things like that.
Now, as you point out, there's a lot of problems with the underlying foundation that they're on, but the whole point of a stablecoin is -- so Bitcoin's the most decentralised, it's the one that's globally decentralised; whereas, what a stablecoin is doing is saying, it's centralised, but the central hub is outside of the country that is confiscating your dollars and is having a currency crisis. So if you're, say, Nigerian, and you hold Tethers or something like that, they perceive that as safer than if they try to store dollars in a local bank.
There's a precedent of countries like Lebanon or Argentina; when they have currency crises, they say, "Oh, you have dollars in the bank? We're going to go ahead and convert them to local currency at the exchange rate we pick", and so any attempts to protect yourself from that inflation just fails. So, they'd rather have this peer-to-peer version with a central hub outside of the country.
Of course, they have to rely on that hub, they have to rely on that protocol, and so it's not an ideal long-term solution, but it's obviously an important bridging tool for the environment that we're in right now, because a lot of people, if you make $400 a month and you have $400 expenses a month, you can't risk volatility for that, especially if you're trying to save for a 3-month, 6-month, 12-month period; being 100% in Bitcoin is challenging, and that's where stablecoins can be useful for them, so it's serving a purpose.
Then, there are all sorts of technologies, like Taro and things like that, that could eventually bring them back to Bitcoin and Lightning. I mean, they originated on Bitcoin, they moved out to where this market activity made it cheaper, maybe they'll come back, so we'll see what happens over time.
Peter McCormack: Yeah, it's fascinating that Tron has become this technology that's been super-useful for people in these jurisdictions. Okay, so it's been really fun in the last few months attacking specific subjects with you and getting into the weeds on specific subjects, the shows have been super-popular. But I have had people coming back saying, "Can you get Lyn to do an update on the macro environment? It's getting a bit scary out there". So, I talked it through with Danny, and that's really what we want to do with you.
I feel like everything is happening, as you said; inflation has continued to rise, but there's lots of weird other things going on. I know you study this day-to-day, so I kind of want to get a bit of an update from you. A starting point really is just more of a general overview. What the hell's going on Lyn; what is going on?!
Lyn Alden: So essentially, we're having an inflationary crisis, and it's hitting developed markets for the first time in decades. I mean, developing countries go through this regularly, or at least many of them do, and now it's hitting developed countries across the board, some harder than others, especially Europe, less so Japan, but really across the board, mainly because commodities are a global market, and that's a big driver of what's causing this as well; supply chains.
Whereas last year, we were in this pure inflationary phase, now we're in this central bank counterattack phase, where they kept saying it was transitory, they kept saying, "Don't worry about it. There's base effects", and things like that. Some of the base effects were real, but they were basically sugar-coating the type of inflation that we were actually getting and probably about to get, because they weren't acknowledging how much new currency supply was created in a short period of time, compared to real-world constraints around commodities and logistics and things like that.
Now we've added a Russian war to the mix, so that further makes it challenging to optimise commodities where they need to be. And then, we also had very draconian Chinese lockdowns, a very large percentage of the population, and that's the manufacturing hub of the world and the shipping hub of the world, so that kind of gums up the supply chain problems. So, we had both limitations on the real-world side, while also having a lot of currency having been created. So now, we're seeing inflation roll through the system, and it's particularly getting bad in Europe, but it's bad throughout the world at this point.
So now, central banks have their credibility threatened, where they said it was transitory, it's far higher and less transitory than they sold the idea would be, and so now they're in the phase where they're trying to tighten policy. But the whole point is, unlike say the 1970s, there's so much debt in the system that trying to tighten policy is this kind of temporary thing, where they want to act like they can stabilise this whole thing and we can get back to positive real rates, we can totally normalise this.
The problem is that the only way for the central bank to push back on inflation is to reduce demand. They can't print oil, they can't print copper, they can't print ships, they can't just magically create new pipelines and get all that stuff where it needs to be. And so they say, "Okay, there's a supply side constraint, we have high inflation. If we reduce demand, we can take the edge off prices". But what is a reduction in demand? It's a recession. So, right now inflation's very politically unpopular, but you can bet that if you were to reduce demand and increase unemployment, you'd have different types of things that were unpopular, that would also be unpopular.
I think, at the very core of it, there are two main problems. One is, we've underinvested in energy in multiple ways for several years, and so there's just not enough energy, and it doesn't get easily to where it needs to go; so, that's number one. And that's very different in the past decade where we spent a large portion of the time with an energy oversupply, because we brought a lot of new types of oil to market, particularly shale, and we also had a slowdown in emerging markets. So, demand was less than anticipated and supply was more than anticipated, so we had this glut of oil for a period of time, and that really just stabilised prices, brought them low. That was good for some industries, obviously bad for the producers.
But now, due to the combination of nobody wanting to invest in that because the prices are so low, and because of ESG concerns and things like that, there's been underinvestment and we've kind of drawn forward a lot of the benefits we got from shale. So, that rapid increase in shale can't keep continuing the way it was; there's only so much shale oil that's available, and its very fast decline rates requires constant capital injection. So now we're in this phase where we don't really have enough energy, and it also doesn't get to where it needs to be, and so that acts as a constraint and that takes time to work through. The market forces have to work through that and find new energy to bring to market, different types of energy.
Of course, the other one is the whole supply chain. So for the past 10, 20, 25, 30 years, we've had this period of persistent globalisation, where we're finding these big pockets of labour throughout the world, that were previously relatively unused in the global market sense, and optimising that, or geographic arbitrage, where you say, "Okay, instead of having this expensive factory in Detroit, we'll go ahead and move it to China". So, you arbitrage that labour cost difference, and we've had that pressure really for 25 years now, especially the Chinese part of it.
In some ways, it's been longer than that, but really that past 20-, 25-year period's been very aggressive, in terms of how much globalisation's happened, and that's been a very disinflationary force. So the concern is that as that levels out, and even if it just doesn't deglobalise, if it just stops continuing to globalise, that's going to probably be inflationary. And then if it actually pulls back, and we actually pull some supply chains back to the developed world, that's even more inflationary. And of course, that benefits some of the workers in those countries. So, the whole thing is based on where you are in the system, what you want out of the system, and the main taker I think is if the next 10, 20 years look very different than the past 10, 20 years.
Peter McCormack: So it's a case of, what is the least bad choice?
Lyn Alden: Yes.
Peter McCormack: Why is Europe suffering worse than maybe the US?
Lyn Alden: Well, a couple of issues. One is that obviously, a lot of their energies rely on Russia, so that's a big factor.
Peter McCormack: And we've just had the embargo, or potential embargo announced, which I've been trying to understand how do they replace those energy sources immediately?
Lyn Alden: Well, they're not going to do it immediately; that's the challenge. Basically, you have the challenge between the real world moving the molecules to where they need to be, and the political desire to not get them from certain sources, which is understandable. Mainly, the United States is more energy self-sufficient, not completely. We basically export some of our energy, we import some of our energy, but we're not fully reliant on importing, whereas Europe is far more reliant on importing, and particularly from Russia.
Then, two, just political movements around decommissioning nuclear plants, things like that. And so, Europe's in a tougher spot. And then also, just from a central banking standpoint, the euro's a more challenging currency to manage, because you have a monetary union without a fiscal union in that region. Whereas in the United States and, say, Japan, you have both a fiscal union and a monetary union for the most part.
Peter McCormack: So, how do they square that in Europe, say if the US wants to print some money for example, how do they do that in Europe? Do they have to do an equal spread of the printed money? How does that actually work?
Lyn Alden: Well, money's created in the current system a couple of different ways. The main way is by banks lending. When banks lend money, they unintuitively create money into existence; that's basically how this works. And of course, they only can lend if they think they're not actually going to default on that, because then they're in trouble.
The other option is, you can run very large fiscal deficits and have the central bank create money to buy the bonds, either directly or if that's not allowed, they can just buy it on the second-hand market. So, the government sells it to the public, and then the central bank creates money and buys those bonds from the public. So essentially, they're buying it from the government. So, that part's not different between the United States and Europe.
What's different between the United States and Europe is that the United States, the different states have unified a lot of their expenditures, so military, Medicare, social security, these are under federal hold. So, if you look at state debt as a percentage of GDP, across the board it's pretty low, especially for the major states. So, a more typical state might be under 10% debt-to-GDP. So, most of the debt is either private markets, like mortgages, or on the federal level. There's relatively small debt on the states. Now, there are specific areas of pension problems and things like that, but actual raw state debt, as a percentage of GDP, is low.
In Europe, because a lot of those complicated expenditures are still at the country level, but they don't control their own currency, basically they don't have their own central banks, they share the ECB, you have a problem where Italy has 150% debt-to-GDP, which the only one really buying Italian bonds is the ECB. Foreign entities don't really want to buy Italian debt. They might want to buy German debt, but they don't really want to buy Italian debt.
So, your problem if you have high inflation, the ECB's one of the most ill-equipped to say, "Okay, we're going to stop doing QE, we're going to raise rates, let the chips fall where they may", because then you'd probably get a eurozone breakup of some sort. This is what happened back in 2012. Until the ECB came in, you had huge spreads blow out between a lot of the southern countries and the northern countries, because it's as though -- it's like the US states, but some of them had 150% debt-to-GDP, and they're all running their own retirement systems and things like that.
So, it's a much more complex system to manage in Europe, both from the energy side, based on just physical realities as well as some of their political decisions; but then also, just the complexity of having definitely sovereign countries share the same currency.
Peter McCormack: So, does the UK have itself in a more advantageous position, because it isn't part of the single currency?
Lyn Alden: Yes, by not giving up its own currency, it's not in that same problem.
Peter McCormack: But is it a weaker currency because it's a smaller currency?
Lyn Alden: Not necessarily. I mean, some of the strongest currencies in the world have been small ones, like Switzerland, Singapore. Over the past century, one of the very few currencies that has really kept pace with the dollar has been the Swiss franc. And really, it would have been better than the dollar if they had not purposely stopped it from strengthening.
So, size matters in some ways in this context, because for example, if you're a large currency, you can do things like increase your odds of being able to buy oil, for example, in your currency. So, United States can do it, China might be able to do it, Europe can do it. So, the bigger a currency is, the more it's widely recognised. But it can also do it by having a long track record of just a very strong current account surplus, very strong currency management. You can be perceived as kind of a safe-haven currency.
Peter McCormack: Why has Japan weathered the storm better than, say, other countries?
Lyn Alden: One is that they have less political polarisation, so they don't have the same problem with Europe, where it's just totally separate countries trying to work together with the same currency. Japan has relatively low levels of wealth concentration; they have this pretty uniform system; they have a pretty low healthcare cost, despite the fact that the population's aged; they have a very hard-working society. But they are not getting out of this unscathed. So for example, they're a big energy importer, so that's costing them right now.
Then two, because they have so much debt-to-GDP. Now, unlike Europe, it's all denominated in their own currency, they can control that. The problem is that they don't want yields to get too high, because if you have 200% debt-to-GDP and yields go up, you start to get a fiscal spiral. So, their big problem is that they're pegging yields super-low, they're doing yield curve control, which is a theme I've been talking about for a while; they're actually doing it. They're just saying, "Okay, we're not going to let our ten-year government bond go above 0.25% per year", and the way they enforce that is they're willing to buy any number of those bonds at that rate. They basically have a peg and they can enforce the peg, because they can print unlimited yen to buy any bond that's issued.
Now, the challenge there is that the market can't get the rate that it wants, it sells the currency. So, we've had a rather sharp yen devaluation compared to dollar and compared to a number of other currencies, and so they're facing their own challenges for sure. But I would say the most challenging one to navigate by far is what's happening to ECB, whereas Japan and the United States, as challenging as it is, is somewhat easier to manage.
Peter McCormack: But the primary issue here you're talking about is the amount of debt now in the system?
Lyn Alden: Yeah, I think the two biggest issues are the debt in the system and the fact that, unlike the prior decade, we're now in a commodity bull cycle, where we don't have oversupply, we have undersupply, so it's kind of like we're marking to market now some of this debt. The whole point of sovereign reserves is that sovereign reserves, like Treasuries and these other types of bonds, they're basically supposed to be able to buy you goods and services at a reasonable price for a long period of time, and you can just simplify it and say, "Buy energy at a reasonable duration".
If those reserves are no longer able to buy -- they just buy you less and less energy every year, because now there's an energy shortage, that threatens the whole system. That's really the first time we've been in this environment. Now, we had a big energy bull market in the 2000s, but that was mostly from the demand side. We had a strong growth in emerging markets, we had a weaker dollar that kind of allowed that emerging market boom to happen, and supply came alive quickly in different ways. So, that tested the system, but it didn't break the system.
Now we have actually undersupply, this is probably the biggest challenge that this very debt-based system has ever faced.
Peter McCormack: But they can increase supply, right?
Lyn Alden: Over time, yes.
Peter McCormack: Right, and what I don't understand is how do you have a sudden undersupply? Is it just because of what's happening with Ukraine and Russia, and therefore there's an undersupply in specific areas? There hasn't been a sudden increase in demand for energy; we haven't seen a sudden massive increase in population, we haven't seen some massive economic growth. Or, is it because we had a slowdown for COVID and we're essentially trying to restart markets?
Lyn Alden: That's part of it. So, it's a bunch of factors coming together. So, price is set around the margins, so it actually takes rather small differences to affect the whole environment. So, going into pre-COVID, the world was oversupplied with oil, because shale oil ramped up very quickly and investors were willing to do so profitably. They kept saying, "Drill, drill, drill", they were free cash flow negative. Saudi Arabia tried to flood the market with oil to try to kill the shale oil producers; it didn't really work.
So basically, there was just more oil than the world knew what to do with, prices were low, and then that started to get worked out, but then COVID happened and we have, of course, a massive collapse in demand, with the lockdowns and things like that. And then we had a sharp resurgence in demand. Some of the supply was killed during that period, so some of the weaker players went out of the market, and there's also increasingly a lot of -- it's not really socially popular to invest in hydrocarbons now, so a lot of large pools of capital devested.
Then, there's a big movement to shut down nuclear plants and things like that, so we're undersupplied in many ways. And you had this big demand resumption, while supply didn't really fully catch up in the same way that demand did. And then, natural gas is a less fungible market than oil. So oil, you can move barrels around pretty readily. There are pockets where it's challenging if there are no pipelines, if it's inland really far; you can have these weird anomalies. But for the most part, oil's a pretty global market. Natural gas is a lot harder to transport, so it's a lot less fungible; it's more expensive.
So, even before the war, natural gas prices in Europe were spiking tremendously, and so that was a shortage. Russia was unable to supply enough compared to the demand that Europe had. Russia was still supplying contracted amounts, for the most part, but Europe demand had upticked and there just wasn't really a lot of spare capacity. And it was being met by LNG from the United States and elsewhere, but that takes billions of dollars of infrastructure to build and very long amounts of time, it's a very complex process. So, there's only so much LNG capacity to do that. So, there's an arbitrage opportunity there, but it's structurally limited.
Over years and billions of dollars, you can build more, so eventually that gap can be closed, but it's a less fungible market. So, that already was a challenging situation where we've not invested for years, while demand slowly ticks up, and particularly it came up rapidly after the lockdowns came out. Then, when you throw the curveball of Russia invading Ukraine, suddenly one of the biggest oil producers, (1) they could shut countries off, (2) countries want to shut themselves off from them, and suddenly the market got even less fungible than it was before, both for gas and then also potentially for oil.
So, you have both supply-side problems, and you have resumption in demand. And this is not really unique. If you go back in history, commodity cycles tend to go through these boom/bust periods, where prices are low, so nobody wants to invest; and eventually, like with Bitcoin, where if it's super-low and it's all going into hodler hands, eventually you just run out of liquidity and you get a price spike.
The same thing happened in the commodity markets, but it takes decades, where prices are low, nobody's investing. Eventually, supply is just dwindling and demand keeps inching up and eventually you have a squeeze. And as price starts going up, a lot of capital starts coming into the space, eventually it gets overexuberant, you overbuild, and then that's what causes the next period of low prices.
Peter McCormack: Right, okay.
Lyn Alden: And these are generally 15-year cycles.
Peter McCormack: Yeah, because there has been talk of $300 barrels of oil. I don't know if that will be achievable. Where are we at now; is it $140, $150, is it higher?
Lyn Alden: The last I saw, it was $118, but it changes every day.
Peter McCormack: $118, yeah. But certainly, if you get to $300 for a barrel of oil, there'll be a lot of investment in that infrastructure.
Lyn Alden: Yes.
Peter McCormack: But that takes time. Investment in nuclear, I mean I've got no idea, but I can imagine it can be a decade to build a nuclear reactor with all the regulatory processes to go through and the investment and the cost. So, your view is this could take 15 years to get us back into an energy bull cycle?
Lyn Alden: I don't know about 15, but I think that this is going to be the story for the decade, that I think it's going to take a lot of new supply coming online. So, energy's the key area; we're also going to need more copper and more nickel and things like that. And then, energy's also used for fertilisers, that's where it ties into the food angle. And even transporting food, that takes energy.
So, even making wind turbines, making solar panels, hydrocarbons are used to do that. So, that's a way; you can either burn hydrocarbons, or you can take hydrocarbons and say, "We're going to put them into this project that will give us more energy over decades", but it does require that upfront investment to dig mills out of the ground, construct the things.
So, I think there's got to be a lot of investment in real-world goods this decade, and it's not unusual for this to happen, it's only unusual for this to happen when debt is so high. That's what makes this cycle -- we have to go back to the 1940s to find a similar type of environment, 1940s.
Peter McCormack: Yeah, it's a super-complicated problem. I recently interviewed somebody called Alex Epstein, who wrote a book about fossil fuels, and his belief is that humans flourish with an abundance of energy, and we need to massively overproduce in terms of energy. And he's of the belief that we should continue to burn fossil fuels, and we should mitigate the effects on the environment and on the climate.
I struggle with that, as somebody who has researched and looked into the impact of climate change, but I also see the downstream effects of not having enough energy. But at the same time, I mean today my brother forwarded me an article from India where the temperatures are so hot at the moment, it's having an impact on agriculture, and there are dehydrated birds dropping out of the sky. And, trying to match those two problems is super-complicated. It feels to me like nuclear is a solution, and you're pro-nuclear, I believe, we have had that conversation before?
Lyn Alden: Yeah, for the past few years, yeah.
Peter McCormack: Yeah, so it feels like that's where the investment needs to go. But there's going to be this massive impact in the short term. I can only talk about things I've read in the UK, or things I'm aware of. People cannot afford to fill their cars up, and maybe travel as much. I even saw one story that just didn't cross my mind, so there's a chance a bunch of swimming pools in the UK will close down, because they cannot afford to heat the pools, it's too expensive. Or they have to raise their prices and people won't go swimming, or they have to let staff go, or they have to have their pools a bit cooler, or open for less hours. These are these downstream effects that never even crossed my mind, and I'm sure there's hundreds of these now, thousands of these.
Lyn Alden: Energy's one of the few things that touches almost everything. I mean, basically all of our economy is around using energy to basically make the world more suitable for us. And, just from the maths, nuclear is one of the safest and most abundant ways to have clean energy. There's also solar and wind work very well in certain types of environments. There could be breakthroughs in things like algae, or things like, just basically ways to harness energy.
Peter McCormack: From algae?
Lyn Alden: Algae, yeah, biofuels.
Peter McCormack: Okay.
Lyn Alden: You can, say for example, genetically modify algae to be more optimal for biofuel production and things like that. There's all sorts of long-range things. There's deep geothermal energy, right, so there's geothermal energy, where you tap into, say, Iceland where it's near the surface; but there are also theoretical technologies, if we get better at drilling, we can go down deep enough so that almost anywhere in the world, you could get geothermal energy, which is rather clean.
So, there's long-range things that could potentially solve this; but in the near term, near term meaning a decade or more, the world's pretty short on hydrocarbons. I think that is a challenge, because we can talk about what we want, but also people will literally starve if we don't, as a society, have enough energy. So, I think people's views on energy are going to be challenged this decade. These rough times are what tests different beliefs about what we want to do or where we want to go.
In some ways, there always is a trade-off between environment and abundance, but there's ways to optimise that as much as possible. I mean, for example, natural gas and coal, even though they're both fossil fuels, they're not the same. I mean, one is generally cleaner than the other, for example. There are different ways to optimise this over the long run.
Peter McCormack: Are you following much about what's happening in Sri Lanka; I assume you're aware?
Lyn Alden: Yeah, to some extent. Basically they're having a currency crisis and an energy crisis, and that's an example of what can happen. It starts at the periphery, at countries that are not economically secure, energy secure, and then you can have mayhem and you can have people suffer, because they're not able to get the resources that they need.
Generally, a lot of these revolutions, the catalyst ends up being that food and fuel prices spike. So, you have an unstable situation, but it's good enough, because people are able to get the food they need, the energy the need, so they think, "Well, I'm not going to out on the streets, even though I don't like the situation". But then, when they can't even do that anymore, they're like, "I'm going out on the streets". So, that's why a lot of these revolutions seem to happen in rising commodity price environments.
Peter McCormack: Civil unrest. I think you talked about that with me before, civil unrest and that's followed by populism.
Lyn Alden: Yes.
Peter McCormack: Interesting. I was tracking Sri Lanka. I think Stephan Livera shared a video; I was watching a news article on it. I'm pretty sure they got to the point where they ran out of money to secure their oil purchases, or to be able to pay off their oil debts, so they got to the point where the county had no fuel left.
Lyn Alden: Yeah, they're very low on capital, that's the whole thing. If you don't have sufficient reserves, sufficient savings, and then you encounter a crisis, you can literally run out of things. So, we're seeing that in a number of places, and Sri Lanka's kind of on the forefront of that unfortunately.
Peter McCormack: Yeah. Do we even know how a country, well you'd probably know, how does a country like Sri Lanka get out of this? Is it new loans with the World Bank, do they have new agreements with the IMF? What happens in a situation like this?
Lyn Alden: Well yeah, you can have humanitarian organisations come in, you can have these big government types of organisations come in and do loans and things like that; or, they just go through mayhem and there are some pockets that are able to get capital and keep operating. But it's a very dangerous environment, there's no easy way out. If you're building up a capital base from nothing, that's very hard to do. They basically have to bootstrap all over again and it's super-challenging.
Peter McCormack: It's a convergence of so many bad things: high amounts of debt, high inflation, war, energy crisis. I'm trying to understand myself, are they all related? I mean obviously, a war ideally wouldn't have happened, and for some of us that was a bit of a surprise that came out of nowhere, but that is compounding the effects of these already very difficult situations.
Lyn Alden: I think a lot of them are related. There's that whole book, Fourth Turning.
Peter McCormack: Fourth Turning, ends in a war.
Lyn Alden: The reason I like that book is because I focus on the quantitative side, because I look at the long-term debt cycle, which was a topic popularised by Ray Dalio. And if you just look at the Fourth Turning and long-term debt cycles, it's the same cycle. So, one's describing the quantitative aspect of what's happening, and one's describing the qualitative happening.
For example, if we look at the 1930s and 1940s, during the Great Depression, we had a collapse of the private debt bubble, and you started to get around the world rising populism, and you started to get countries -- basically, as the pie stopped growing, people fight harder over the remaining pie. So, countries were doing all sorts of trade frictions with each other, trying to get trade advantages over each other, making less and less free trade; and inside countries, you had rising populist movements, and especially it obviously became really bad in Germany and parts of Europe.
Then you had that in Japan and then that eventually broke out into war, and then you had this more inflationary environment where all these countries were going all out with their fiscal expenditures to try to get resources and win the map, win the war. So, it wasn't just like these things all randomly happened, you had a series of things lead into each other.
So, I've used the 2010s and the 2020s analogue comparing to the 1930s and 1940s, because in the 2010s, or really in 2008, but for the most part we went through it in the 2010s, we had a popping of a private debt bubble. So you had, in the US and elsewhere, a lot of private debt get wiped out and people lost their homes, and you had this stagnation environment that looked a lot like the 1930s, except without a dustbowl and we did it in an era of smartphones and things like that, and we had more money printing, so it was less deflationary. But it was just this stagnation with just better technology.
Then the 2020s are shaping up to be like the 1940s, where you have an external catalyst comes along, in this case a virus and then lockdowns and then fiscal response, to keep people solvent through that. So we print a lot of money, after a period of having low commodity prices and underinvestment, and now we're going into the 1940s and the one thing I wasn't sure we'd see the same level of kinetic type of thing we saw in the prior 1940s. I wasn't trying to call for a war comparison, I was calling for a fiscal and inflationary commodity comparison, but it has become inevitable that you get these types of conflicts.
So, in this environment where the pie's not growing, you're more likely to get conflicts. And then, those conflicts can ironically make the pie even smaller, because now it's less efficient to move things around, and so it in many ways makes the crisis worse.
Peter McCormack: Yeah, it's quite interesting with regards to what's happening in Ukraine and Russia. I've had people on the podcast to discuss this, and there's a couple of schools of thought where one school of thought is Russia is invading a sovereign currency and Putin has some desire to reunite the USSR; and there's another school of thought where NATO expansion is a threat to Russia.
But an interesting thing that's happened to one of my friend's, he's married to a Russian lady, and he has money in Russia. He contacted me a few weeks back, I can't remember when, and he said, "I need to get my money out of Russia". He was very fearful of what was going to happen to the currency. He said, "Can I do this with Bitcoin?" I said, "That's one way. If you want to maintain stability, then you need to convert it to Bitcoin, send it and sell it immediately". And he was finding it so difficult to get the money out and he didn't.
I spoke to him a couple of weeks ago and he said, "My money's actually worth more". He had an expectation the rouble was going to crash, but actually it's not. His money's worth a lot more now and is there a third school of thought; is this another strategic move to make the Russian currency stronger, or is this just some weird effect that nobody expected?
Lyn Alden: I think a lot of it's tied into energy. So, if you have a country that doesn't export enough, then no amount of capital controls can really maintain the value of that currency, it's just going to collapse. Whereas, if you have a country that exports things that the world needs, like Russia; they have a big chunk of not just energy, but also nickel, wheat, fertiliser, they have a big chunk of the resources that the world needs. So, the world needs it and the world sanctioned them, so they have less ability to import now, but their exports are still desired and the prices of the exports went up. So, the dollar value of their exports is higher.
So actually, their current account surplus, their trade surplus spiked, because you simultaneously reduce their imports and increase their exports, value-wise, and so it's almost like a short squeeze where it's real, but it's also partially affected by these sanctions and capital controls and things like that. And, it kind of comes down to the fact that at the end of the day, currency's a claim on the resources of that country, and Russia does have a lot of resources. And resources doesn't just mean natural resource, it also means labour resources and infrastructure resources. In Russia's case, a lot of it is natural resources.
So, they have cards to play, because Europe can say what they want, and Russia can say, "Okay, we're going to shut your gas off, unless you do our terms". And so, there's this very challenging -- it's not an easy playing field. The West has advantages, but Russia also has key resources. I don't go into the whole political thing of it, obviously I'm not in favour of war, I'm not in favour of what Russia's doing here at all, and so I'm very supportive of the people in Ukraine. One of the things at the Human Rights Foundation, we had actors there from Ukraine and Russia. There were people there that were, say, Putin oppositionists. They're in favour of democracy in Russia; real democracy, not like fake democracy, not where journalists and political opponents get jailed and killed and things like that.
Peter McCormack: Bullets in the head and fall off balconies and, what was it, Navalny; is it nine years, he's just been sentenced?
Lyn Alden: Yeah.
Peter McCormack: Yeah.
Lyn Alden: Someone from his organisation was at the Freedom Forum, I met her. And so, it doesn't really have to be about the people, it's about regimes playing chess with people's lives, and especially what Russia's doing. It's a terrible situation for human rights in general.
Peter McCormack: Yeah, I don't know how this ends. It feels like it's all down to a small number of people's egos.
Lyn Alden: It all comes down to things like that. And I know people will push back and say, the United States, we've done a lot of atrocities around the world too.
Peter McCormack: Of course.
Lyn Alden: When you have these centralised areas of power, they go out and they can exert their will on other countries and it's unfortunate.
Peter McCormack: The British too. The British have done it, a long history, and people remind me. Okay, let's get back to more domestic issues, because I think people will want to understand this, because there is a domestic issue. There's been a lot more talk of recession again. I've seen it more in the UK press recently, because I've been back in the UK. As I understand it, the definition of a recession, is it two quarters of negative growth, or is it two months; I can't remember?
Lyn Alden: There are a couple of different definitions. One of them is two negative quarters. Another one is just a contraction in economic activity over a prolonged period of time. So, there's different organisations in different areas that are responsible for calling a recession. The thing is, they don't call it until hindsight. They don't say, "Okay, we're in a recession" in real time. Often months later, they'll go back and say, "Oh, that's when the recession started".
Generally, the two quarters is the one that's referenced the most, but there's no official global definition of a recession.
Peter McCormack: But generally speaking, it is a drop on economic output, and we see that with the UK. We have a real cost of living crisis at the moment. I think 20% of the population is in fuel poverty, which means they cannot afford to pay their fuel bills. We know there's a massive increase in costs of shopping. I mean, I saw one thing that the budget pastas are now up 50% in price. But there's a massive increase, 10%, 15% on a wide range of things. It's really hurting people's ability to feed their children.
We see stories of families skipping meals; there's all these different stories that people are doing. Even the radio shows or TV shows and newspapers are running articles about how to survive a cost of living crisis, how to manage your budget. But this cost of living crisis, I guess the impact of this is people have less money to spend on other things, so there will be a downstream effect on maybe retail environments or people going to concerts. All these things, this is what leads to a recession.
Lyn Alden: Yeah, well there's multiple ways you can get to a recession, and one of them is certainly when energy and commodity prices take up an increasing proportion of the economy, because basically mandatory spending pushes away, as you described, discretionary spending. And so, humans are happier and more flourishing when you have to spend a very little amount of your money on the necessities of life, and you can spend more on travel and luxuries and optionality. But when those necessities increase in cost, for one reason or another, that is a common trigger for recession.
Another one is the central banks and the fiscal force to try and push back on inflation, as I described. They can't just create more oil fields, but what they can try and do is reduce demand for things. So, in their vision, the best is to have a very mild recession, but they call it a soft landing.
Peter McCormack: How do they do that though?
Lyn Alden: Well, historically they don't. It's one of those things, they always want a soft landing and then they don't get a soft landing, and then they get a hard landing and they have to reverse course. It's rather unusual to get a soft landing. I mean technically, for example, in the 2000s, after the dotcom bubble, in the US at least, you had a relatively soft recession; it wasn't a particularly severe one, but that was a very different cause. And so, there are recessions that are worse than others.
They're not delusional in thinking that everything's a giant crisis, but it's one of those things where analyst, Luke Gromen, would say, "We no longer have a dial, we have an off and on switch", and they still think it's a dial. But because there's so much debt in the system, that dial starts to become like a switch. You're either growing or you're collapsing, because there's so much debt that if you're not growing, you're falling apart pretty quickly.
Peter McCormack: But how do they centrally drive a reduction in demand?
Lyn Alden: One thing that they can do is to tighten monetary policy to make it harder to get a loan.
Peter McCormack: Oh, okay.
Lyn Alden: So they can slow down housing activity, and that's a big factor for a lot of economies. And then especially junk debt has harder getting financing. Then they can also combine that with the fiscal side can stop doing stimulus, things like that. They could raise taxes, which they're not doing because it's politically unpopular, but when they're not sending out stimulus cheques, in many cases right now --
Peter McCormack: Well, they're talking about that in the UK in one way. So, the energy bills, we talked about this previously, I saw a massive increase, like nearly a 300% increase in my energy bills, and it's a material difference; you see it in the bills. You extrapolate that out for the year and realise how much you're going to spend on gas and electric. I'm fortunate enough to be able to cover that, but I know there are other people who are less fortunate.
So, the government recently, Danny, can you just double check this? I think they're talking about sending cheques out, or everybody in the country they're going to offer something like £400 off their energy bills in October, or something like that.
Danny Knowles: Yeah, a £400 energy bill discount in October.
Peter McCormack: Yeah, so I was trying to work this out in my head, because is this every household in the country?
Danny Knowles: Every household, yeah.
Peter McCormack: So I was thinking, well first of all, I don't need this, so why do this, and maybe half the country doesn't need this. But is the cost of trying to means test it too expensive?
Danny Knowles: Well, it also says that people on benefits get an additional £650.
Peter McCormack: Okay. But there's those on benefits, and it depends which benefits I guess they're on, but what I'm saying is I do not need this and I know a lot of people who don't need this. So, what that means is there are two other options. They could, for some people, maybe do it for two months; or, just the cost of doing this is lower to the government. There's another point I'm going to come to on windfall taxes.
So, I was trying to think about all that, and I was trying to think, "Well, why £400 discount in October?" because really, for most people about £100 a month might make that big difference, if they're controlling it. Why just do it as a lump in one month?
Danny Knowles: Is it because it's getting colder, so energy prices will go up?
Peter McCormack: Yeah, but I don't think some people's energy bills are going to go up £400. But even if it is, what about November, what about December, what about January, what about February? They're all cold months in the UK, every single one of them, so I didn't understand one month. Does it say how much the cost of it is there?
Danny Knowles: For the entire programme?
Peter McCormack: Yeah.
Danny Knowles: I'll have a look.
Peter McCormack: I mean, this is essentially a stimulus cheque of sorts. Probably speaking, I think we're going to see that quite a bit this decade. We're already seeing it, as you point out, in Europe and some places, and I think we're going to see it more broadly where the stimulus cheques we saw before were these broad ones, where you could literally take your cheque and buy Dogecoin with it, which I don't recommend, but people did. And I think the types of stimulus we're going to see going forward is energy and food subsidies.
That can alleviate the hardship for the people that need it the most, but it also does contribute to ongoing stagflation and currency devaluation. So, at the end of the day, the key thing they have to do is figure out how to get more energy and more commodities supply to come online. These other attempts, I think because of how much debt is in the system, they basically can't let recessions happen for long periods of time. If you look at every recession, there's always these stimulus effects.
In a healthy environment, like let's say you had a low-debt system, recessions can just work themselves out. You eventually clear out the malinvestment and then the cycle starts anew with enterprising individuals coming in with their capital, and they kickstart the next investment cycle and the next consumption cycle. But because there's so much debt in the system, the way I would describe it is, if you have this meticulous garden that you've elaborately designed; if you let that go, it starts to unravel pretty quickly. It's not like a healthy, balanced forest, for example.
Peter McCormack: It sounds like my garden!
Lyn Alden: So, our economy is this meticulous garden that if they stop interfering with it, it starts to get messy pretty quickly. So, I think what we're going to see, we're going to see some level of economic deceleration or outright recessions, and then we're probably going to see some increasing usage of this targeted stimulus for things that people have no choice but to spend on.
Peter McCormack: And then, how is that financed? If it's financed by printing more money, we increase the money supply, which drives inflation, which feels to me like its own death spiral. But they're talking about financing it through a windfall tax on the energy companies, right?
Danny Knowles: Yes.
Peter McCormack: And I think they talked about raising £15 billion for this? But windfall taxes themselves, to me they seem a little bit targeted, arbitrary, and in a free market, unfair. The politicians' rhetoric is, "We have an energy crisis, but these oil and gas companies are making record profits". What does it say?
Danny Knowles: "Oil and gas firms will be hit with a 25% windfall tax."
Peter McCormack: Yeah. What is the historical background to windfall taxes? To me, I guess it just seems politically popular, because it's just targeting a group that is demonised. But what is the impact on the companies themselves? Is it just, "Okay, we make 25% less profit this year?"
Lyn Alden: The history of it is generally that whenever the state needs funds, especially more so than other times, they will go after demonised groups to try to get them. The challenge here is that energy companies made very little money in the past decade, especially in the past five years. Let's use North America shale, for example. Most of them were free cashflow negative during that period. They basically were investing a lot and not making money for it. Now, we didn't do reverse windfall taxes, we didn't give them money --
Peter McCormack: Yeah, of course.
Lyn Alden: -- but now, due to the opposite happening, they said, "Okay, we're going to stop doing that, we're going to stop siloing money into unprofitable profits. We're going to be more capital-disciplined; that's what our shareholders want", so you get this spike in profitability. But that comes after a long stretch of unusually low profitability. If you look at, say stock indices, energy companies have been utterly terrible performers over say a ten-year period, compared to broad equity indices, and now they're finally getting the spike. And then you come in and say, "Well, now you're the ones benefiting this, we're going to take that away".
Peter McCormack: "Take your money".
Lyn Alden: So, in the near term, you say, "Okay, it makes sense". So, you take a chunk of that, you give it to people. The challenge of that is, the downstream effect is, does that affect that company's decision to invest in more energy in your jurisdiction? Do they want to bring more energy to market, or do they want to maybe not put a lot of capital in that industry, because they say…
It's like, say there's two developing countries. One is known for respecting property rights, and one of them, every ten years, has a revolution and they take all the assets. If you're a foreign entity, and you have capital and you have expertise and you want to go, say, develop an oil field, you're going to pick the one that you have a high probability assessment that they're going to respect that you own the assets and you can profit from them. You're not going to put it in the one where you don't know the future of those assets.
So for example, if there's this tendency with windfall taxes, the risk is that a company might say, "Well, if this is going to keep happening, maybe we should not really keep investing in the energy space, maybe we should go elsewhere". Maybe investors will say -- even though a company might want to keep investing in energy space, that's what they do, outside investors might say, "I'm not going to keep investing there, because it's just going to keep getting windfalled, so I'll invest elsewhere.
Some of these can be potentially short-sighted. The ultimate goal in the long run, the thing that actually fixes this, is to bring more supply online, and ideally the cleanest and longest-lasting. In the near term, you just need more supply; long term, you want the cleanest, best supply to come online. And of course, there's always efficiencies you can do. You can incentivise people to make their homes more energy-efficient. There are ways to reduce arbitrary energy loss.
Peter McCormack: None of these things we've talked about seem to be solving the problem of the amount of debt in the system. Historically, I've watched the Ray Dalio video on the short- and long-term debt cycle. Historically, how does the debt get removed from the system in the long-term debt cycle? Are there debt jubilees; are there defaults? How does that tend to happen?
Lyn Alden: Historically when debt, as a share of the economy, is this big, it defaults in one way or another. It could be outright defaults, and that's common, for example, in a developing country where they owe dollars. They can't print dollars and they just say, "We can't pay the debts, so sorry".
Peter McCormack: That's probably what will happen in Sri Lanka?
Lyn Alden: Yeah.
Peter McCormack: Okay.
Lyn Alden: And then, in developed countries, it generally happens instead through inflation, where they say, "Okay, we're going to pay the debt, because it's denominated in a currency we can print, so we're not going to default, but we're just going to print a lot of money and we're going to pay those debts. You're going to get every dollar or every euro or every pound you're owed --"
Peter McCormack: Yeah, it's just going to be worthless.
Lyn Alden: "-- it's just going to be worth maybe half as much as it was when you bought that security". So, I think that's what we're going to see, that inflation is going to be higher than interest rates, on average, for a long period of time. Now, you can get a deflationary shock like you had in 2020, you can get these brief moments where that's not true; but I think in general, we've already been in a period where inflation's above interest rates, and I think that's going to continue for quite a while.
Peter McCormack: And what are you predicting with interest rates? I know that's difficult, but the UK we're at, what was it, 9%, it's predicted to go up to 10%; the US is 8.3%, I think; the eurozone was 8.1% today, I think. I mean, they're all round about that. Do you think these will settle down at 5%, 6%? Do you think we could go up to 12% to 15%? I know there's real-world figures, but we can only really benchmark what we actually know. Or, do you think we could stay around 8% and it could be for years?
Lyn Alden: This partially depends on human decisions, which is what makes it challenging. So, giving an answer to that partially depends on, what is Putin going to do? What's Europe going to do in response to Putin? What's the US going to do? So in general, I think we're, say in the US, potentially reaching a plateau for a period of time, where due to the base effects, you can kind of level off a little bit. But I think the underlying problem is still unresolved, that there's just not enough energy and certain commodities available. And Europe's got it the worst, but it's global, because commodities are a global market.
My expectation is that, if you look back at the 1940s and the 1970s, you had very high inflation, but it wasn't a straight line; you had periods of pushback. And so I think right now, we're in a period of pushback, and it's challenging to say how successful it's going to be, because it partially depends on understanding the breaking point where people riot, understanding is it going to be any sort of de-escalation in this war or no. So, those are variables that can influence it.
So, in general, I am positioning it towards an inflationary outcome, without trying to predict exactly what level inflation's going to be, especially because as you point out, there's real numbers. There are different pockets of inflation. So, I think that looking back at the end of this decade, energy prices are going to be much higher in dollar, euro, pound, yen terms than they are right now, but I think it's not going to be a straight line.
Peter McCormack: I think it was a few shows ago, you said to me you think the story for the next decade is inflation; so, it's clearly not going to be a short-term solution. But I assume at some point, when things start to level off, it will become a good time to start investing in certain areas. You as an investor, what kind of time horizon, what kinds of things are you looking at? It's important to have some dry powder ready.
Lyn Alden: So, I'm rather defensive as central banks are trying to push back a little bit, they're trying to suck liquidity out of the market. But still, the majority of my assets are in these long-term hard assets, things like energy producers, pipelines, profitable companies producing real things, Bitcoin, some gold, different types of commodity exposures, basically real-world exposures, real estate.
Basically, my approach is to have this diversified set of real assets, as well as some cash for liquidity to rebalance into any sort of liquidity shocks we get, kind of take advantage of that countercyclical approach. So, when people buy high and sell low, I try to just tweak it a little bit and do the opposite. But I'm not actively trading the market too aggressively; just a small dial that I kind of lean in when things get a little cheaper, and I back off a little bit when things get a little bit euphoric.
Peter McCormack: But those hard assets, property, gold, Bitcoin, but also energy companies, because based on everything you've said, you're assuming that there's going to be some significant investment in energy production somewhere?
Lyn Alden: We're seeing it to some extent. I mean, we're seeing more interest in the space, but I think a lot of the market is still thinking this is transitory, and they're also concerned about what percent of the profits they'll be able to keep and things like that, and so we're not seeing this massive ramp-up in capex; we are seeing an interesting capex. And then ironically, some of the supply chain things can feed into that. I mean, some of the materials they need to do energy capex are actually held up from logistics problems. So, it all ties into each other. But I think that this is a multi-year process to realign supply chains, to some extent, as well as bring more types of energy to market.
Historically, these commodity cycles are these five- to ten-year cycles. I mean, they take quite a bit of time and capital to ramp up, and I don't really see this one being any different. And I'm kind of monitoring, as we're seeing high energy prices, is tons of more capex flooding into the market? Not really. We're seeing an uptick, but we're at no way of measuring that we've seen a massive glut of oil coming anytime soon.
Peter McCormack: And what about what's happening with rates? I know it's very difficult for the central bank to raise rates at the moment. But with regards to curbing inflation, that is one of the weapons they have. I think rates went up slightly in the UK again recently. Do you think there's a chance that rates will go up significantly, or do you think it's just not palatable?
Lyn Alden: So, I think they're going to raise rates until something breaks. So, in the 1970s, they were able to raise rates, because debt as a percentage of GDP was low. You could put rates into double digits, and that interest expense was still relatively small. I mean, it put the economies into recession, but it didn't put you into a depression. Whereas, in the 1940s, when you have sovereign debt that's 100% debt-to-GDP, and it's even worse now because you have all this private debt, if mortgage rates are 10%, 15%, if Treasury debt is 10%, 15%, everybody's insolvent.
So, I don't think they're going to really get to positive real rates, meaning rates that are higher than inflation levels. They're certainly trying to uptick them, but of course they're doing it rather slowly and we're sitting here, as you said, with 8% inflation and like 50 basis points here, 50 basis points here, which is funny because that's actually the fastest they've done it in 20 years. In the US, we haven't had 50 basis point hikes for 20 years. But it's also woefully insufficient.
Basically, I think that regardless of what they do with rates, that's not what solves this. What solves this is bringing more energy abundance and commodity abundance to markets. And in the meantime, I think they're going to try to protect their currencies until you start to get outright recession, or you get credit markets freeze, or you get sovereign bond markets get illiquid and messy. So, in the United States, that could mean that whenever you see the dollar gets too strong, foreign sector doesn't buy a lot of Treasuries, banks are stuffed full of Treasuries, who's the marginal buyer of Treasuries? So, you get less liquidity in the market, it gets messier.
Then as I say, with Europe, who wants to buy Italian sovereign debt right now?
Peter McCormack: Not me!
Lyn Alden: Who wants to buy that and hold that for ten years? Who wants to buy Japanese Government bonds at 0.25% for ten years, when they have 200%-and-something debt-to-GDP?
Peter McCormack: I'd rather buy Bitcoin for ten years. Okay, amazing, really, really helpful. What are you optimistic about, Lyn?
Lyn Alden: Energy investments, Bitcoin long term. Good real estate, healthcare, healthcare stocks, things like that. I think that there are --
Peter McCormack: Why, because you think we're all going to get stress and sick and be eating garbage?
Lyn Alden: It's just an area that I think is profitable and unfortunately, they have a lot of ways to get a lot of money.
Peter McCormack: But is it something that generally tends to be more profitable during economic difficulty? I know, for example, during recessions it's good to invest in Dominoes!
Lyn Alden: So, healthcare's one of those mandatory expenditures, where people are not going to cut down on their healthcare as much as they're going to cut down on their retail spending when energy prices get high. So, I'm rather defensively positioned. When we look at long term, I'm optimistic on just human ingenuity.
So, I think we're going through a "Fourth Turning", so a time period where we're examining out existing institutions, we're decreasing a little bit of trust in them, whether it's governments, whether it's media, whether it's corporations; basically the things that have been built over the past 50, 100 years, and wanting to build new institutions. And, that transition's always very messy, and sometimes it turns out very poorly. Sometimes, you get a worse next state than the prior state. You could have the wrong sorts of ideas about why those institutions went wrong, and then build even worse ones. That's kind of what you had in some of the prior cycle; it's part of what led to the world wars.
On the other hand, you can tear them down and rebuild better institutions. So, my always hope is that we actually identify the problems and then get through the difficult period, and then build out better institutions going forward and better technology and better ways of doing things.
Peter McCormack: Amazing.
Danny Knowles: Just before we close out, you're expecting the next ten years to be bullish for commodities, but what about equities?
Lyn Alden: I think it depends where you look. Like I said, I think that there are equities linked to commodities that are attractive. I think there are areas, like in healthcare and things like that, that can hold up pretty well. I think that there are regions, say in Latin America or Southeast Asia, where their equities can do pretty well. And then I think eventually, you're going to eventually have more and more Bitcoin-related equities. Right now, they're a private market, but they could become public.
I think there are certainly pockets of equities that can do pretty well. Generally during rising commodity environments, a lot of the equities than benefited from disinflation, so a lot of the tech stocks, a lot of the very growth-oriented things, those are the ones that kind of suffer and stagnate. It doesn't mean their underlying assets do poorly; it just means they might have been so overpriced that their stock price can kind of chop along or go down, even as their underlying business does okay. I think that's the environment we're in, where Adobe's going to keep doing great in terms of, say, selling software, but maybe their higher price point got ahead of itself, and that's not even the most extreme example.
Danny Knowles: And that's again because there's just too much credit in the system?
Lyn Alden: Well, there's too much credit in the system; and also, when commodity prices are very low and interest rates are very low, we price equities very high. For example, if my alternative is, I can buy a ten-year Treasury and get 1% interest rate, I might be willing to accept equity risk if I expect 5% returns, on average, over the next ten years. I'm getting 4% better than the Treasury. But if inflation is high and Treasury yields are 3%, 4%, I might want 8%, 9%, 10% equity returns, and so I have to pay a lower price on the same equity in order to get those higher forward returns.
When you get that more inflationary higher rate, higher commodity price environment, you get margin pressure on companies, and you also generally get lower valuations on companies, and that's why that transition from higher margin to lower margin, and higher valuation to lower valuation, can mean stagnant, choppy, sideways stock markets, sometimes down, sometimes up, but not very much, even as the underlying products and services are of course still growing and useful.
Peter McCormack: Well, thank you, and anyone listening, even though you hate me saying this every time, go and subscribe to Lyn's newsletter, because it's amazing and very helpful and I read it every month. Lyn, thank you, this is amazing, thank you.
Lyn Alden: Thanks for having me.
