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we could easily withstand the rate increases that were necessary to fight inflation oh and by the way the reason the fed can't raise interest rates high enough to fight inflation is because it would create not only a depression but a financial crisis you know one of the ways that you make money as an investor is to take advantage of situations where you have a mispricing of assets because if the market perceives let's say a stock to be worth more than you know it is that there's something flawed in their analysis and it's causing the market to overprice an asset that gives you an opportunity to make money by selling that asset same thing as a buyer if the market fails to assign an appropriate value to a particular stock if you believe that the market is wrong and that the stock is worth a lot more than what the current market price would indicate well now you have an opportunity to take advantage of that misperception because you could buy the stock at a much lower price than what you know the stock is worth well i think that is exactly what's happening right now on a much broader scale because all sorts of asset classes entirely not just individual companies but asset classes are extremely mispriced because the market really has no idea what's about to happen and how it's going to impact the value of those assets you know it reminds me a lot of the subprime mortgage bubble because early in those in that bubble you know 2004 2005 2006 it was apparent to me that the market had mispriced these bonds that the bonds were trading actually above par when in my opinion they were worth zero i understood the dynamics behind these securities and the housing market which ultimately was how these securities derive their value i knew that when real estate prices dropped and that a drop was inevitable but that was something that buyers of uh you know mortgages couldn't even conceive was a possibility i knew that when prices dropped there would be a wave of the faults and that these securities would ultimately be worthless and that created an opportunity to short them and there were several other investors who uh achieved a degree of fame and fortune by coming to the same conclusion but the reason that people were able to sell these mortgages that were basically worthless and sell them at above par was because the vast majority of investors were clueless as to what was actually going on and it's those same clueless investors that are now overpaying for us bonds for the u.s dollar for u.s stocks and who are undervaluing things like gold and silver and maybe emerging markets and value in dividend-paying stocks relative to growth stocks and before i get into the economy which is i noticed was the the topic of my talk uh the recession that everybody denies exists i want to start off by talking about inflation because that's actually the bigger problem and that's what's driving the recession and it's what's also driving i think the misconception as to how assets should be priced going back to the beginning years the federal reserve told us the public investors that the problem was inflation was too low that the fed had decided that two percent inflation was its target it was no longer a ceiling where inflation had to be below two percent which is where the two percent even came from the fed decided to redefine that ceiling as a target and the fed told us that we needed two percent inflation that anything less was unacceptable that somehow if the cost of living did not rise by two percent every year it was bad for the economy that if the cost of living only went up one and a half percent that was a problem the problem that the fed was going to solve by making sure that the cost of living went up by two percent per year and the way the fed was going to deliver on that promise was through monetary policy so the fed kept interest rates at zero and they continued quantitative easing because inflation was still below this target that they decided was somehow the economic sweet spot when it comes to inflation that we need to accept a two percent increase in the annual cost of living because anything else could be uh economic disaster so the fed pursued this policy then when the fed actually achieved its goal when inflation started to come out at two percent or even slightly above the fed did not declare victory no the feds said it still had more work to do because the fed said that even though we're at two percent inflation now that's not good enough we need to make up for all the years that inflation was below two percent so that's when the fed all of a sudden redefined its two percent target to a two percent average the fed said that inflation must average two percent over time and because we had so many years below two percent well now we need to have years above two percent to average all that low inflation back up to two percent of course all this was nonsense from the very beginning i said that it was nonsense that the fed claimed that we needed two percent inflation that two percent inflation was not better than one percent inflation actually the opposite one percent is better than two percent and zero is better than one percent and minus one percent is better than positive one percent when it comes to the cost of living the lower the better if the cost of living goes down that means the standard of living goes up so it was nonsense that the fed said we needed more inflation and it was even more nonsense when the fed said we needed to make up for the fact that we didn't have enough inflation in the past by having more inflation in the future now why did the fed make this stuff up well they wanted to justify the monetary policy and pretend that there was some kind of benevolent purpose to what they were doing there was not the sole reason that the fed continued to print money and keep interest rates at one percent was to sustain the bubble that it had inflated both in the economy and in financial markets and also to sustain the us government which thanks to the fed had taken on so much debt that the only way the fed could service that debt is if that the only way the treasury could service that debt is if the federal reserve kept interest rates as low as possible which was zero and continued to buy a lot of the debt that the treasury was selling so they continued these policies not because it benefited the public it actually hurt the public it benefited the government in their ability to deceive the public and it benefited investors because the policy propped up asset prices so if you owned a lot of stocks or real estate you benefited from having those prices artificially high and the ability to borrow against those appreciated assets at artificially low interest rates
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