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most people think that cash is safe cash is the least safe investment it just doesn't have the same volatility to it but it has because they're producing so much cash it has a negative real return in 1945 we began a new world order 1944 we created a new monetary system the Bretton Woods monetary system and then we created that new world order and that created a bull markets and stocks and an American world order for the most part there's a cycle that we're used to in which um whenever you have a d economic downturn the Central Bank hits the uh gas and can create debt expansion and that produces an increase in demand and that happens in three phases at the cycle normally it's interest rates you lower interest rates and the economy turns up but when you hit zero interest rates uh which happened in 1932 debt crisis 1932 we had zero interest rates then you go to the second type of monetary policy in which central banks print money and buy Financial assets they had liquidity and those purchases those sellers of bonds who get the cash go out and they buy other Financial assets and we have the process going through and that's the second type of monetary policy so the only two times that that happened was 2008 to 9 1929 to 1932 zero interest rates print money monetization that'll carry you so far and then there's what I call monetary policy three which means that that money does not trickle down to the population and go all the places that it's needed to go in other words the coordination between fiscal and monetary policy so that the central bank is buying assets of a different sort a wide range of assets producing liquidity and also having the effect of buying government debt and monetizing it and and that's the late cycle of an expansion the that's what's driving the markets now that's what's driving the economy now for example today the Federal Reserve and the government is creating the liquidity that we're seeing in the markets and it has big implications for the value of money what is the value of money where does money go cash is going to be a poor investment and so it goes else quicker so that's the character of the environment which means that if you look at the returns of asset classes and you take cash isn't it an interesting world when you have zero or negative interest rates and then there's the desire to create a spread so the short-term rates are lower than long-term rates and there's so much liquidity it is the central bank that is making that market so when we look at the market today it needs the storehold of wealth and you see it reflected in all asset classes so that's the main driver and it also has very big geopolitical implications because as we come into this environment where we have the second influence the wealth Gap the political Gap it means that the distinction of how money and the bills are going to be divided and how that will affect tax policy and the like will matter a lot I think it's very much like the 1930s which means it doesn't produce immediately a general level of inflation it negates deflationary pressures and what it does is it produces currency depreciations over a period of time in the 1930s all currencies in the early 30s are depreciated in relationship at that time in relationship to gold and so what we see is the same kind of thing happening without a general level of inflation but not just gold it goes into other storeholds of wealth and stock particularly certain types of stocks to very much the same as 1933.
in 1933 March of 1933 Franklin Roosevelt severed the connection with gold printed money and made money available and that was the exact bottom in the stock market very simple similar to April 9th when Federal Reserve and the treasury did the same thing so that goes into other assets such as stocks and so on crates so reflation it is necessary to be done because the consequences of not doing it are unacceptable the wealth Gap and so on we're in a situation where every individual every company every government has a certain amount of Revenue a certain amount of expenses and a certain balance cheek and when the revenue goes down to be low or inadequate relative to the expenses and there's not an adequate balance sheet then defaults and restructurings take place that's true for the population as a whole and that's true for a number of businesses hence the policies that we're seeing what has been true in history is that when you have an economic downturn that's a serious economic downturn and less effective monetary policies at that same time and you have a large wealth and values Gap and political gaps you have tend to have fighting internal conflict and so Rising internal conflict about how to divide the wealth pie is very very normal historically and so that's the dynamic I think that we're now seeing that will become manifest in changes in tax policy and so on the investment environment government going forward will be very different from the environment of the past I mean think about it as a zero and low very low returning asset environment because the liquidity that's in the market is driving the excess returns of all markets down to be low in relationship to the very low cash rate so negative real returns not good for cash and so on the most important thing is to know how to diversify well and what I mean by that is to go beyond just the traditional 60 40 stock Bond mix or even the same countries and to broaden that diversification to include in that portfolio assets that might seem unusual to include some gold to include inflation index bonds to include to think about the currency exposure to think about safety as different most people think that cash is safe cash is the least safe investment it just doesn't have the same volatility to it but it has because they're producing so much cash it has a negative real return it's a tax that may be two percent a year you lose money in terms of cash so you have to think about risk differently and you have to diversify best that's the most important thing to have a well-diversified portfolio it's so the uncertainties that we have today are so great in terms of all the things I mentioned the tax policies the geopolitical certainly we must experience it with the virus you know will the next wave come back and how will it be dear diversification can be achieved without reducing your expected returns because of the way that asset classes are priced and then when if you're going to take tactical bets from those then those tactical bets Alpha on top of that strategic well-diversified portfolio should have highly Diversified God that's a deviated liquidity is going to be more important than before because things change in unexpected ways look at how in many of the cases the businesses that you one would have thought was a good business and let's say you're in private equity and and that you're with that company and so the restructuring the ability to rebalance and diversify and to make and to be cautious about making a highly Diversified set of bets is I think the uh the future but thinking even of asset classes thinking about the value of money you know we look at asset classes and we say oh do I want my money to be in stocks and which stocks but we don't think about stocks bonds we think about those traditional asset classes but we don't think about the value of money and what's going to happen in terms of the printing of that value of the money and how to diversify as it well so I think those are the things that have to be attempt paid attention to in much as they were important things in years prior to 1945 and but the interesting thing about that is when you look about when interest rates let's say bonds approaches zero expected return clearly their ability to go up in value or interest rates to go down in value is limited or in order to have the impact one has to leverage those a lot and that's not desirable but clearly through history I studied um the last 500 years of Cycles going back to the Dutch cycle in terms of the bank of Amsterdam and that whole cycle at all cases central banks will print money and devalue money when they get in that course the basic problem of a depression is basically a debt liquidity problem and so always through history the the choice will be reflation even when you hit interest rates in the way that we're seeing now and so to understand that the nature of the diversifying asset has shifted to be of the sort that I'm describing in terms of other assets that at that particular time benefit from reflation because it will be reflate or die and so we will always see reflation and that's why in history you see that all currencies have devalued or died over a period of time particularly in such periods we're in a new paradigm
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