00:00 - Intro

00:50 - Revisiting Chris's 2021 prediction about bonds and inflation

02:34 - What is the Federal Reserve?

04:21 - What has happened to the US economy since COVID?

06:20 - The monetary base

07:12 - Three ways the Government can throw money around

09:02 - Interest rates and inflation

10:35 - The Fed has grown massively

12:03 - How the Fed buys and sells debt

13:41 - Quantitative easing and tightening

15:05 - What value does the Fed provide to the world?

17:30 - Summary. Thanks for listening!

________________

Chris is a novelist author of financial thrillers.

CRISIS DELUXE

A PRINCE AMONG MEN

00:32 - Elon Musk, like very few people in the world, has the personal capital to buy Twitter, a publicly-traded company, and take it private. He filed a Schedule 13D with the SEC and made moves.

04:10 - Musk bought 9.2% of the company and the board had to recognize him as the largest shareholder, and they offered him a seat on the board. Musk declined because of the handcuffs they would have put on him.

08:50 - At no point so far has the board made mention of free speech, censorship, and the other reasons Musk has publicly stated he is buying the company to change.

12:40 - The Washington Post has published over 75 articles and op-eds to date that are against Musk's move to buy Twitter, claiming a centa-billionaire owning such valuable public utility/public square is dangerous. And yet they are owned by centa-billionaire themselves; Jeff Bezos.

15:18 - Twitter's board is mostly foreigners from places that do NOT have a first amendment like we do. Their values are not in line with freedom of speech.

17:22 - The government/media/political establishment attacking Musk is reminiscent of another man who challenged the power structure in our financial system, Michael Milken.

21:18 - Summary. Thanks for listening!

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00:23 - Our guest, Kimberly Spencer, is joining us from Australia

01:48 - Kimberly's background

07:13 - Chris gives an example of investment bankers taking advantage of companies and treasuries, and yet everyone (including the companies) were rewarded for it.

14:08 - Kimberly elaborates on her concept of "different levels, same devils".

17:34 - Money doesn't usually change you. Money is an amplifier of who you are.

17:46 - What is Kimberly's advice for bridging the authenticity gap? First, know your values. Second, own your results.

22:36 - The etymology of the word "decide". It's to cut down and kill other possibilites.

25:45 - Feelings only last about 90 seconds, and emotions stack up like jenga blocks.

27:46 - Summary: Follow Kimberly Spencer @crownyourself 
 

More from Kimberly Spencer

www.crownyourself.com

Social media: @crownyourself
 

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00:45 - Today we're going to discuss corporatism vs. capitalism.

05:04 - Small businesses operate in a free market. That's real capitalism. But large corporations often do not, because they can bend rules and policy in their favor.

09:00 - 20% of the US economy no longer has a free market. It's healthcare.

14:02 - It used to be the majority of doctors were sole proprietors. Now, over 90% of doctors are employees of major healthcare companies. 

20:17 - The only people who pay full price for medicine are people who don't have insurance. Generally, the lowest-income people.

25:34 - The free market isn't roaring anymore, because Government got in the way, and giant corporations are dancing along with them. 

26:08 - Follow the example of Ludwig Erhard, who forbade companies from talking/lobbying with government officials. It forced separation of the economy from politicians.

27:22 - Summary - Open up the free market. It's the most fair, equitable system...but corporatism is not.

 

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00:54 - We're going to dissect a NYT article: "Buy stocks to prosper - buy bonds to sleep at night."

04:16 - Instead of taking a loan from a bank, when you buy a bond, YOU are the lender to the government, or a corporation, or locality. A bond is a guarantee to get your money back plus an agreed-upon interest rate (usually a low interest rate).

10:11 - The article begins by congratulating stock holders, and cites stocks that are primarily up because of government policies on energy and printing more money. These stocks rising are actually symptoms of a huge problem with our economy, and the good times cannot go on forever.

14:24 - The problem is that bonds have been artificially low for a very long time (<2% yield). When those bonds come due, they could be owed at higher interest rates. The amount of capital we're talking about here is massive. Entire institutions could collapse when the bills come due. Your money is only guaranteed as long as the bond issuer doesn't go bankrupt.

18:39 - Where should we put our money when the Federal Government is so reckless with spending?

23:20 - Find large-cap, established companies with low debt, and invest in those. Because they can adjust their prices to account for inflation, and they also won't get wiped out when interest rates come back up.

27:31 - Germans in 1924 used to need wheelbarrows full of money to buy groceries, because inflation was so out of control. It collapsed their economy and largely led to the Third Reich and WW2.

30:52 - Summary - Thanks for listening!

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01:00 - A major foreign bank, TransPac, was dealing in bonds with smaller Asian countries, and they did not have enough cash to honor the debts if they were going to be called.

03:49 - The moment you mismatch your assets and liabilities, you are taking a risk. 

05:23 - TransPac was buying bonds in smaller countries–in those smaller currencies–but they borrowed the money to buy those bonds in US Dollars. When the smaller countries' currencies were collapsing in value, TransPac still owed US dollars to its creditors.

09:00 - This crisis was a simple timing issue. Every month the bank needs to keep their lending available to you. But something can happen to them, or to you, and the time between your return on investment and you owing money (the "gap" between your assets and liabilities) is the problem.

16:33 - TransPac held a ton of loans, and they lacked sufficient liquidity to pay off short term debts. So Dusty and Sebastian go to some clients and offer them a discount so they can recoup cash NOW to keep the lights on, so to speak.  They narrow the gap, de-risk their portfolio, and raise cash.

18:30 - Markets are driven by fear and greed. Dusty knows he has to send a signal of strength to the markets. If he doesn't, banks will pull their lines of credit and TransPac will collapse.

22:37 - Bond markets are almost completely unregulated because they are professional markets. Small investors aren't allowed in those markets. And it's a brutally tough, vicious market. If you can't play with the pros, don't get into the game.

23:56 - Summary.  Thanks for listening!

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01:12 - Inflation is the sickness of money. Money is worth less over time, because there's more of it in the marketplace.

05:12 - World War 1 was funded by taxation, borrowing (war bonds), and the printing of new money.

09:12 - Money is no longer stable in the economy, and has not been since the creation of fiat currency. Fiat meaning the currency is not backed by anything except an agreement on its value.

15:28 - A strategy to combat inflation is to borrow at a low interest rate and pay it back in cheaper dollars over the years. But this is risky when the economy faces a downturn.

16:41 - Incentivizing people to take out debt is a perverse incentive, because those who manage their money well and do not have much debt will be penalized. The point is, the reason why governments allow for inflation is because it's a way of silently stealing from people. It devalues your money.

19:50 - Hopefully our inflation doesn't go worse than the 1970s, but it's hard to tell. Worst case scenario is hyperinflation like Germany in the 1920s, Brazil and Argentina in the last few decades, and Venezuela today.

22:48 - The government has no incentive to be fiscally responsible. 

26:16 - Ludwig Erhardt helped turn Germany from destroyed to an economic powerhouse in one generation. Two main policies. First, he banned crony capitalism and special favors. Second, he lowered the tax rate from 85% to 18%.

27:46 - Summary. Thanks for listening!

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02:40 - Welcome to the show, Justin Simpson

04:34 - Retail investors may be exposed to an underwriting by buying shares through a broker. But most people get a piece of equities through funds... instead of putting money into shares, put money into a vehicle (fund), which owns a lot of various shares.

07:01 - What other types of funds are out there? Most funds are in the equity sphere.

11:31 - Buzz value...are investment fads here to stay? Example: r/WallStreetBets and GameStop ($GME).

13:21 - GameStop was so extreme there was basically nothing the hedge funds could do.

15:31 - What is a hedge?

17:52 - Short selling, explained.

30:53 - When/how do you select the equities you bundle together into your fund?

36:11 - Fees matter. 2% vs. 20 basis points (0.20%) cumulative over many years is a massive different.

37:18 - Both Chris and Justin have created funds. What did they create?

43:45 - In Crisis Deluxe, Dusty comments about Asian markets dumping Argentine stocks. That happens because they need liquidity to cover their positions. Just because you think there are uncorrelated risks, they can be correlated.

47:51 - Summary: Investment bankers make funds that eventually retail investors like us can buy. Actively managed mutual funds are assembled by a team of investment bankers, who then go to big institutional investors to get big money behind him. If they get that big money secured, they begin to acquire equities to assemble the fund. Once the fund is made, shares become available through brokerages to retail investors.

50:38 - What is an "accredited investor"?

52:28 - These rules and regulations exist to protect people. Do not assume the worst motivations behind the rules to exclude small investors from the higher-risk investment opportunities. It's to protect them from such high risk investments, to make sure if you invest $20k or so in something, it won't break you if you lose it all.

55:04 - Thank you for listening!

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00:56 - The underwriting process is one of the core functions of an investment bank.

02:22 - Example of the Joe Rogan podcast, which sold to Spotify for about $100M

07:14 - Capital markets are like an ocean of money. They are renewed, just like the water cycle.  Underwriting process is like the rain that falls in the mountains, trickles down into rivers, and flows back into the ocean of the capital markets.

07:49 - The underwriting process is about the only place where an investment bank actually takes risk. Usually they put the risk on anyone else. But in the underwriting process, they're taking on substantial risk. If the market says your asset is worth less than they paid you for it, they lose money.

09:50 - The investment bank actually pays you for your asset, and then it's their asset. The risk becomes theirs.

13:24 - Crisis Deluxe is a fictional account of the Asian Financial Crisis in 1998. What actually happened in the real asian financial crisis was Peregrine Bank did an underwriting for a bond deal with an indoensian taxi company. Peregrine was on the hook for this commitment, and the indonesian Rupiah currency collapsed and Peregrine could not honor the commitment. So Peregrine went bankrupt, which triggered the asian financial crisis.

15:29 - A normal underwriting involves sub-underwriters that buy chunks of the investment. So the winning investment banks go to others and offer large slices of the deal to reduce their risk. Generally they'll get several sub-underwriters to de-risk a majority of the deal.

17:51 - Brokerage houses also get in on the action, buying large chunks of assets at wholesale price, then turning around and selling shares at retail price, pocket the difference (margin), and sell the assets to individual investors like you and me.

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00:25 - What does a traditional banker do?

02:13 - What does an investment banker do?  They put risk on other people and create a monetization path for non-monetary forms of capital.

04:07 - The peruvian economist Hernando De Soto wrote The Other Path. Chris uses his examples of home titles as something to leverage for capital creation.  Investment bankers can take non-financial forms of capital and convert them into financial capital.

06:14 - When an investment banker does their job properly, they create financial capital where there was no capital before, and they create liquidity, which is the free flow of money between parties. 

06:31 - The temptation of an investment banker, however, is to financially benefit even if you don't. They need a transaction to happen, whether it benefits the parties at all. They get paid on fees.

08:16 - Investment bankers allow ordinary people to take a view (and make decisions) on future risk and reward. Investment bankers give people the opportunity to take risks they otherwise could not take.

09:19 - Investment bankers are essential, but be careful with them.

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https://www.crisisdeluxe.com