Hari Ramachandra  5:59  

Hey, guys. This is Hari. Toby brought up an interesting point: the parallel between the railroad industry and the airline industry and how consolidation brings sanity to an industry. However, the question I have in mind is: Does the airline industry have the same kind of mode that a railroad has? 

Because in order to lay a track, there [are] for each mile a lot of hurdles, regulation hurdle costs, and stuff like that. But that’s missing in the airlines. How long do you think this sanity will last in the airline industry?

Tobias Carlisle  6:36  

My favorite line about airlines comes from Richard Branson, where he says, “If you want to become a millionaire, start out as a billionaire and buy an airplane.” But the point is that it’s not as mighty as the railroad industry. 

However, I think it’s quite easy as you do require an enormous amount of capital. You do need the slots for the planes at the airport. You need to be able to order them. It’s heavily regulated, and it requires an enormous amount of advertising. 

But then, that’s been the case at every stage along, at least since Virgin launched in the 80s. I think it was, and I don’t think that that’s changed necessarily. So evidently, some people can. It is possible to launch and have to compete, even though I wouldn’t really want to do it. I think it’d be a tough ask.

Stig Brodersen  7:22  

Very, very interesting discussion, guys. And it will be really, really interesting to see over the next few quarters what will happen with a Berkshire position in these alien companies. But let’s go on to the next topic. And Hari, I hope you will kick this one off.

Hari Ramachandra  7:38  

Sure. I’ll be happy to, and Stig, this question is based on your recent podcast with Jim Rickards, where you discuss gold, and I did some research based on the information I got from your podcast. 

Is gold really a good asset to hold in your portfolio? So, these are the questions on my mind. And then based on your answers, I have some follow up questions as well.

Stig Brodersen  8:04  

Yeah, I simply love this question, Hari. And I kind of say before, I even respond like, I probably have 10 questions for you. Because I think it’s so interesting that a lot of people are talking about the golden moment, but they talked about it in many different ways. 

So, I think it’s also important for people to understand that whenever they’re listening to this, and correct me if I’m wrong here, but you’re not talking about buying into gold at say $1160 and then sell at $1300. You’re basically looking at gold as a hedge like a currency hacks off the entire system. Is that what you’re saying? 

Hari Ramachandra  8:39  

You’re exactly right. I’m not looking at gold as a trading position, but I’m looking at gold as an insurance. And in fact, I did some research as I had discussed with you offline, and I recently put a post on my blog, basically summarizing all my research. I’ll be happy to share [it] with you to provide in the show notes for your audience. 

But what is confusing when you talk about gold is that it’s a very polarizing topic. You have people who are either passionate for gold or against gold. There’s a lot of people who recommend gold. 

Also, our serial book publishers, their self-publishing books [are] very frequently about gold. So, that makes me a little apprehensive because I don’t know whether they’re recommending something or they’re trying to sell their books. I’ll be happy to know your thoughts and Toby’s thoughts on this topic. 

Preston Pysh 9:32

I’m curious to hear Toby’s thoughts, too.

Tobias Carlisle  9:34  

Well, I know why they published lots of books about them. When I was publishing regularly on Greenback, anytime I put gold in the title of a post, it was worth two or three times the normal traffic. And if you can get buffered commenting on gold, that’s the Holy Grail. That’s like 10 extra traffic, as people want to hear what Buffett has to say about gold. 

And all he has to say about gold is that it’s kind of a pet rock, and it sits there, and it looks sketchy, and he’s not a fan, and I’ve done a lot of research. But I just don’t think I can ever get to the stage, where I have an edge over anybody else in it. 

For me, the only edge that I’m ever going to have is in deeply undervalued stocks with some sort of corporate action catalyst. That’s a really narrow, tiny little sliver of the world to kind of make your living. So I’m kind of an interested observer, and I read a lot about it, but I don’t have any. 

Stig Brodersen  10:20  

I don’t have any view that everybody else doesn’t already have. I really like that you say that, because that really shows that you are a Buffett guy, right? Like you’re staying within the circle of competencies. And you’re not saying, “I wish I could be the 10th best guy at bonds and the 10th best guy at gold?” “Why can’t you just focus on value investing less?” Basically, [that’s] what you’re saying. 

So, that’s a really Buffett way of thinking, and the thing that before I insinuate anyway, that gold might be a good asset class to hold. I just want to put it out there. That’s probably a good idea for everyone to stay within their circle of competence. 

I think the discussion about goals is really, really interesting. And I think that whenever we started the podcast, and this is something that we have revisited a few times, I was definitely of the opinion that gold would probably be the stupidest thing ever to invest in. I still hold that opinion, and I would like to elaborate. 

I still think it’s not a good thing to invest in, but that doesn’t mean it’s not necessarily a good hatch, depending on how you are looking at the world. So, we primarily have listeners in the West, and being Danish, I think I have a very similar view that gold is like a pet rock or whatever Warren Buffett calls it.

But the perception living here now for months in Korea and studying the economic policies and economics in general, for major Asian countries, it’s just very evident that the perception of gold is very, very different. 

And Asian countries have been used to holding gold as a way of storing value. Not growing the value of anything, but storing value because there’s been a lot of good reasons because of a lot of horrible events. 

While it might be a good idea to hold that gold in hyperinflation, currencies being taken back by the government, a lot of things that make a lot of sense that you can more or less trust gold, and again, as a currency, not as an investment. 

Toby has a big grin on right now, so I’m very curious to hear what he has to say.

Tobias Carlisle  12:20  

So, hearing Stig talk then just reminded me of this post on Greenback. Going back now to November 10, 2009. Buffett, evidently, had appeared on CNBC Squawk Box with Becky Quick. She’d asked him about gold. 

And he had responded something along the lines of, “You got to dig it up out of the ground in South Africa and transport it to the US, and you put it back in the ground and the Federal Reserve in New York.” 

Also, he didn’t think that was a great asset to invest in. And he knows that Coca-Cola and Wells Fargo, maybe that was a bad example, but they’re going to be making money down the track. They are both still here, so I guess he was right about that. 

It reminded me of this great quote, and this is Buffett in his 1979 letter to the Berkshire Hathaway shareholders. I’ll just read it out because I think it’s pretty funny:

“One friendly, but sharp-eyed commentator in Berkshire has pointed out that our book value at the end of 1964 bought about one half ounce of gold. And 15 years later, after we’ve plugged back all earnings, along with much blood, sweat, and tears, the book value produced about the same half ounce.”

So basically, very early on in his career, when he was doing his very best investing, a fairly low capital base, you got 15 years of blood, sweat, and tears of the greatest investor in the world, and he just broke even with gold over that period.

Stig Brodersen  13:37  

Yeah, wow! That was really interesting and really surprising. I was not aware of that, for sure.

Preston Pysh  13:42  

It’s interesting your comment about when he was making the comment in 2009. Because gold did what? [A] 300% run after he would have made those comments?

Hari Ramachandra  13:52  

Also, they brought up another point. So the issue with gold is that the value of gold is truly in the eye of the beholder. And it’s really not possible to calculate the intrinsic value of an asset like gold. But it’s basically what the next guy is willing to pay. 

Buffett also has a code, where he says that gold is a good way of going long on fear. But it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two in order to make a good return on your investment. 

So this shows maybe, since you said, from 2009 to 2016, gold has gone up by a huge percentage. Does it mean that there is a lot of fear in the market still, even after the stock market [has gone] up, [but] not as much as it does? 

Preston Pysh  14:50  

In the last three years, four years, it’s done really poorly, but from 2009 to…When did gold hit the top? 2012, 2013-ish, somewhere around in there. It did really, really well. It had an amazing run.  It did really, really well [and] had an amazing run. Now, I guess I see it a little bit differently than the way that Hari just described it. I’ve heard that description of the value of gold a lot. 

There was a thing I read on Ray Dalio’s blog, relating to how he views the value of gold and how it’s looked at in comparison to credit and how the central bank’s manipulate the monetary baseline and how they expand the amount of currency. His description of this for me was crystal clear. How this operates, it made so much sense to me. 

So like now, Stig and I, although we’ve been talking to Jim Rickards and a lot of other people about how it’s starting to make more sense and how the Fed is going to have to do something to expand the balance sheet during the next credit contraction, whenever that happens. But between now and that point, I don’t understand why somebody would want to own it at this point. 

But I do understand why people would want to own it in a 5-year or 10-year horizon. It makes total sense to me why they’d want to own it in that time horizon. So for me, I guess I look at it a little bit differently than the way Hari described it, but I am definitely no expert on gold. But that’s how I understand it, at least.

Hari Ramachandra  16:08  

Preston, I agree with you about the time horizon regarding holding gold. And also, that’s one of the observations that I have, too, is Ray Dalio is the best among all the folks who talk about gold in terms of explaining stuff about how gold is priced and the importance of gold in a portfolio.

Preston Pysh  16:30   

One of the things I want to talk about, so I had this interview with Bill Miller. I mean, [he’s a] legend out of Legg Mason, [a] Chairman. He was managing $75 billion, and we had a podcast interview with him. And I’ll tell you, he had some amazing comments with respect to the spreads, when you’re looking at equities, the bonds. 

And so, right now, here in December, to give everyone the date, it’s the 12th of December 2016, and the 10-Year Treasury is having a huge, monumental sell off. And we’re at 2.4% on the 10-Year Treasury. 

But when you look at stocks, a PE Shiller on stocks is around a 27. So we’re a little bit over a 3% return in the stock market right now. So, Bill’s comment to me was, “Hey, as long as you have, call it 6, or 0.6%, or 0.7% spread between stocks and bonds.” 

He really felt like there was more to run on this. The thing that really stuck out in my head with the interview was, he told me, “If you could get a PE multiple of 35 back in 2000, when interest rates are 5% or 6%, he said: ‘What in the world makes you think that you can’t get there now, when interest rates are at 3%?’” 

And for me, I was just kind of like, I had nothing to say to that. I really didn’t. I had nothing to say to him. I said, “Well, once we get to this fair point where, let’s just say, equities and bonds, or a parody of, call it, 2.7 or 3.0, and the percentage rise on the yield, then what do we see at that point? And he wasn’t so quick to buy into the fact that this thing could come unraveled. And so, I didn’t really have anything to say. I just want to bring it up to you guys and hear your thoughts.

Tobias Carlisle  18:20  

Oh, man. I hate to be the guy to kind of throw this one out there, but I think what Bill is describing is known as the Fed model. And that’s the surplus of return that you get for investing in equities over the 10-Year [Treasury] or whatever. It’s sort of…there’s no real agreement on what the exact Fed model is.

There are quite a few different models out there, but basically, it’s the idea that you get more yield for investing in equities, because they’re riskier than you do investing in bonds, [which are] less risky. 

So the Federal Reserve loves this idea, and I’ll often point to the Fed model. Dr. John Hussman has actually tested it. And if you look at how predictive it is, so at various times, the equities are, in terms of yield, yielding much more than bonds, and that’s the time to buy equities that makes perfect sense and vice versa than when they’re not feeling very much, maybe want to hold bonds at that stage. 

He’s tested and he said, “It doesn’t work. It’s not predictive.” And the reason? Well, not so much the reason, but the conclusion that he has drawn is that the addition of the bond raise to that question sort of doesn’t add any information. It sort of destroys information. All of the information that you need for the return on equities is already embedded into equities. 

So, when equities are yielding a lot, equities tend to do very well when equities aren’t yielding very much, they tend to not do very well. And it’s not the size of the premium over rates. It’s just an absolute kind of measure. You can find that on his website, probably from 2012-ish, 2013. It’s pretty clear that that’s the case.

Preston Pysh  19:49  

I know Jesse Felder destroys that argument as well. He has a couple posts on it as well. To me, the thing that Bill was saying was, he felt like this could turn into a potential bad thing with all these rates coming up, if it happens too quickly. 

He said that’s the thing that he was personally watching. If it keeps ratcheting up as far as the sell off in the bond market, and it’s happening slowly and somewhat controllably. He said, “That money has to go somewhere.” 

He said, “And I think that people don’t realize how much money that is coming out of that bond market, and where they might not realize [where] it’s going to go,” which in his opinion, was going to be the stock market. So, he feels like that in the short term. 

He’s obviously talking in the short term here, [which] has a lot more to potentially run in the coming months, as long as that expectation continues to persist, and that this sell off in the bond market continues to occur. That’s where he thinks the money is going to go. 

Now, you get into the point. And this is what I was really pressing him on. [It] is like, “Where and when do we get to that point where too much is really starting to be priced into the discount rates of the stocks at that point, and you really start to see a major downturn in the equity model?”

Because, I mean, you guys all know when you divide by these higher interest rates and these discount rates, it’s a total massacre [to]  the value of the stock. So, he didn’t really know where that point was at. One comment that he made to me was, he said, “Well, look at the bond yield curve.”

He said, “It’s not flat. It’s not even close to being flat.” And for anybody who isn’t familiar with the bond yield curve, what he’s saying is that the short-term interest rates are still extremely low, compared to the long tail of the interest rates, which are significantly higher. 

He [also] said, “When that starts becoming flat or inverted, that’s when it starts getting really scary.” I didn’t really know what the takeaway from that [was]. I mean, this guy’s a freaking legend. At the end of the day, he’s been through a lot more than I’ve ever seen or dreamt about. So, those are some of the comments. I’m just really curious how you guys are seeing it as well.

Tobias Carlisle  21:51  

I’m not necessarily disagreeing with what he’s saying, is it? One of the things I was just making the point that the yield on equities in relation to the yield on bonds isn’t predictive. It’s not to say that the direction of the yield on bonds isn’t predictable. It must be a matter of logic. It must be when you have very low yield, every other asset, the cash flows from other assets become more valuable. 

When you have very high yields, the hurdle for other assets to get over is very high, so they should be worth worse. That’s why when you see in the 1980s with very high interest rates, it must be the case that other assets aren’t worth as much at that stage. 

And I think Buffett has made a similar comment, where [he] says, “Interest rates act like gravity on assets when they go up. It’s something that I’ve tested.” And you could find in most of history, most of modern history in the US [at least], starting sort of maybe in the 40s or the 50s, you had pretty good interest rates. You had 4% or 5% or 6%. So if your equities were yielding less than that, you could get more yield switching into REITs, and that was a good trend.

Preston Pysh  22:51  

I want to go back to something we were talking about at the beginning of the podcast because I’m really curious about the filtering with the airline stock. I hate to bring up things again that we had already hashed out, but I’m curious how long were you seeing these hitting your filter, Toby? How long before he made the position were you seeing these hit the filter?

Tobias Carlisle  23:09  

It was a while. It was six months, could have been something like that. And I was looking at him feeling a little bit sick because I’ve been raised unbuffered. As an investor, I know how Buffett feels about airline stocks. And I know how I can see that the planes have fallen, that oil and gas is cheap. And that’s the kind of thing that could trigger a screen like mine that’s really only looking for super cheap things.

So, when you’re getting six positions in the screen now, it’s become very…that’s a material portion of the capital that would be committed in a portfolio to that industry. Having said that, they’ve worked really well, so  just every time I try to out think the screen, it just makes me look like a fool.

Stig Brodersen  23:50  

And, Toby, it seems like it’s really an industry bet that Berkshire Hathaway made. It doesn’t seem to me like…because he bought into four different airline companies. And compare that to your screener. It also seems like you’re not necessarily going in and saying this is the one that we expect to be the winner in [the] industry. 

[It] seems like they feel like the entire industry is undervalued, and they’re going to play that, or when you see that mean reversion to the intrinsic value. Would you agree with that? That is kind of like their train of thought in terms of buying into that class?

Tobias Carlisle  24:22  

Yes, in the free screener, which is the largest 1000. I can tell you the names right now. So, they’re all clustered together. They’re still cheap. The two cheapest stocks aren’t airlines, but the next lot are all airlines: Delta, JetBlue, United, Alaska, Southwest, Spirit. 

Preston Pysh  24:42  

And Toby what kind of yield are they priced based on the EBIT or EBITDA to the enterprise value?

Tobias Carlisle  24:50  

So they’re ranging between…Delta is the cheapest at 5.3. And that’s roughly about a 20% magic formula earnings yield and the most expensive, which is also, I think, the best. Southwest is times 7.3, which is about a 14% yield. Yeah, I think it’s not a bad bet. But as I say, everything’s running for airlines at the moment.

Stig Brodersen  25:12  

Yeah. And it might also be, so that it’s not a position they want to hold for a long time. And I know that we’re talking a lot about the general philosophy about holding a grid stock forever. I don’t necessarily think that’s the case here. If you think about how much they accumulate, it’s just take Delta.

For example, they accumulate 250 million, the market cap for delta right now is 37 billion. So, it also seems like some of the positions or all the positions I’ve taken, unless they accumulate those. It seems like smaller positions, where they can make a profit because it’s temporarily undervalued, then perhaps get out and be allocated to other equities at some later point in time.

Preston Pysh  25:50  

Yeah, Stig, you’re saying $250 million is the position that Berkshire took?

Stig Brodersen  25:54  

Yes, Berkshire $250 [million]. So this is just for Delta. $250 million out of $37 billion. So it’s not necessarily as you’ve seen with some of the other bets that Warren Buffett has taken and quoted Wells Fargo, Coca-Cola, and whatnot. I mean, it’s somewhat easy for Berkshire to get out of this position.

Preston Pysh  26:11  

Yeah. And so, if we’re going to even put that in a further context, if we take the market cap of Berkshire, what’s the market cap of Berkshire? $350 billion? Is that right? 

Stig Brodersen  26:12

Yeah, exactly. Yeah. 

So if they took a…let’s just say they took a $350 million position, that’d be .01% of their market cap, just so people understand the big picture here. That’s how big of a position at .01% of their market cap, so…

Tobias Carlisle  26:35  

That’s how big a position I would recommend.

Preston Pysh  26:41  

But it’s an interesting position because I think it’s showing you the mechanics of how they are making their selections in a market that is very expensive. So, they’re still buying. Their position size is miniscule compared to the $70 plus billion that they’re sitting on in cash, okay, which is the really important position that they’re sitting on, because that’s why they have $70 billion in cash in it, compared to this $250 million position. 

But it’s fun to talk about this. It’s very interesting to see how they’re making those selections when compared to all the other stocks that are on the market. And I think Toby’s assessment here as far as how they’re valuing, it is very important for people to pay attention to.

Stig Brodersen  27:26  

I would really love to talk about what has happened in India recently. And I just want to give some background first and then I would really like to hear your thoughts. So what the government decided to do is to take out the 500 [and] 1,000 rupee out of circulation, and these are the two largest notes, and it’s actually just to give you something to compare it to, it’s at 6.4% of all the cash in circulation that you’re just taking out. 

You’re just taking it out, and this is really big because depending on which country you live in, you might not be used to using cash. 

For instance, for me, as a Dane, when I think back of my childhood, that was probably 20 years ago. That was probably the last time I feel I used cash on a somewhat regular basis. I can definitely go a year or if not more without touching any kind of cash in Denmark.

In the US, [it’s] clear that’s more cash by society, but it’s really nothing compared to India. Cash is used for 98% of the transactions in India. This is the number of transactions, not the total volume of all of that settling cash, obviously, but that is how it works. And that was something that really surprised me. 

So, this is a big change in the monetary system in India. You might be thinking, “Why are they doing this? Why are they taking out 86.4% cash out of circulation?” And there’s a lot of reasons for this. 

One thing is that apparently there is some counterfeit money over there. And by forcing everyone to deposit what they have and to change that to other notes, they’re basically cornering the criminals. 

So that’s more of the organized crime, but they’re also targeting normal people, if you want to call [it] like that. That can really show where they got the money from. Because a lot of people in India, they’re simply paid in cash. And it’s not registered in a way. So by that, they’re also forcing people to use the electronic system, which can be monitored. 

And another reason, and this was [what I] recently read, and it might seem a bit out there, but from a macro point of view, it’s really, really interesting. A lot of the cash has not been turned in. So right now, in 501,000 rupees, there were 14 trillion in circulation. 5.6% of those they’re not turned in yet. 

The way it works on the central bank’s balance sheet is that when they’re issuing cash, that’s a liability. All the money that is not cashed in, which will be a lot in the case. They can actually write that off on their balance sheet if they want to and have a cleaner balance sheet. So, I kind of thought that was a very interesting thing to mention as well. 

Now, I just wanted to hear your thoughts on this. Is this a wise choice, given what you have heard? Or is it something that’s really, really bad for the economy? So for instance, the investment banks right now, they’re already talking about a 0.5% lower GDP growth in India this year, just because of this. 

How do you guys see this situation? Is it good or bad? What’s happening right now?

Preston Pysh  30:34  

I just want to say something before I throw it over to Hari, because he’s the guy that I really want to talk to about this. But I think it’s really important for people to understand that I think that what’s happening in India right now is much different than what the Larry Summers and that whole crowd is trying to do here in the US and maybe Europe and Japan with removing hard currency out of our system and just going straight to a digital currency. 

I think what’s happening in India now are two different things. I think what’s happening in India is much more centered around the idea of removing corruption and getting the currency out of the hands of people that are, well, how do they refer to it? Or is it dark money or black money? What do they refer to? It’s called black money?

Hari Ramachandra  31:18  

Yeah. All right. Go ahead. Sorry. Well, I think, Preston, you brought up a good point. So, just to give everybody a bit of a background, the current government, Narendra Modi, his party was elected to power on the promise that they will cut down corruption and what you just referred to as black money. 

And people in the US or the West probably don’t understand the impact of corruption and black money are having on our society back in India. And also, the scale at which it is happening there. 

So one example I can give you, which will probably help drive the point is, when you buy a home in the US, you have escrow. You have a real estate agent. Everything is transparent. You take a loan in, and you buy the property. 

In India, when somebody buys a property, some of the sellers, and [this is] what I’ve observed, it’s most of the sellers. They force you to pay, say, 40% or 30%, officially. That‘s the white part and the rest 60-70%. You have to pay in cash. That’s black. It’s unaccounted for, which you will not disclose to the government. The seller would not disclose to the government. And that’s a normal practice. 

And then, I can go on and on about other examples, and that is crippling a lot of developmental efforts. And also, it’s impacting the middle class and the poor, because they can’t really afford to pay everything in cash, because like other sellers, [they] wouldn’t let you take a loan because they want something in cash. So that’s kind of a background about what’s the situation there. Preston, you had a question.

Preston Pysh  33:07  

I think the thing that’s really interesting about how this all went down was how abrupt Modi basically put this out there in India. It was kind of like nobody had any clue that this was going to happen. And I don’t know how you pull that off at that level, [wherein] nobody knows that this is going to happen.

Hari Ramachandra  33:26  

The way he did it is he came on television at 9 p.m. in the night and said by midnight, one thousand rupees and 500 rupee denomination notes are invalid. So, within three hours they are invalid. Banks are obviously closed after nine, so nobody can go and exchange. 

However, he has given time up till the end of this year. It is almost 50 days, where folks can go to the bank and exchange their 500 and 1000 rupee notes with the new 2000 rupee note and the new 500 rupee notes. So, when they say that they’re taking money away from circulation, that’s not actually true. They’re actually printing new notes. 

It is just that the old notes are going away from circulation. And so, people have, obviously, there are some restrictions where you can’t just exchange everything you have. If you want to do that, you have to show how you got that money. As long as you are able to do that, you can exchange. 

However, you can deposit all the money you have to a bank account, there is no limit. But of course, you will be audited later once you account. So there are a couple of benefits apart from black money and eradicating corruption, and that is that a lot of currency in circulation in India is actually out of the main system, not in banks, and are not productive, because they cannot be loaned to others. There is no economic activity. 

So, one of the side effects that some of the experts are pointing to is that there will be more money or more cash in the bank, which will help bring down the interest rates because they can lend more as well, so hopefully that will help in development activities. 

The other stuff or like in our counterterrorism is one other important aspect of this. A lot of [groups], not only terrorists, but separatist organizations, supposedly use a lot of cash to bribe people or create miscreants. Stuff like that. 

And taking away the nodes of this denomination, one of the side effects that they’re seeing is that [there’s] a lot less disturbance in many areas in India because of this move. So I guess he had to do it secretively otherwise it wouldn’t be effective. [It] hadn’t been announced ahead of time.

Stig Brodersen  35:41  

Yeah. And it is actually very secretive because one of the huge issues they have in India right now is that they don’t have enough cash. And it’s true. What Hari is saying is that they’re printing. 

They have four printing presses in India, but they can’t print it fast enough compared to what they really need, which probably makes a lot of sense, because when you tell that you need to print so much money, I guess some people somewhere have to anticipate there would be a problem.

Another thing, and it might seem a bit rhetorical, but it’s actually a real issue. It’s that it’s really, really hard to break a 2000 rupee note in India right now. I mean, how are you going to do that? The second big note, that’s a 500 one. And people might not have that one either. So it actually creates a lot of friction, whenever you’re still settling things in cash right now. The transaction costs, they’re simply just too big. 

So it’s definitely no joke, not just this year, but also the next year in terms of the expected growth, that a lot of things are simply not produced. A lot of things are not consumed. Because of this change, whether or not it’s the right decision, it’s probably more like a political decision, because there is definitely a lot of positive spillover effect, but I think it’s very, very interesting. 

And it also relates back to our discussion about gold. It’s that you might not buy gold if you live in India because you want to grow your money. But if you are afraid that something like this will happen again, that might be where they can store your value. So, I just wanted to circle back to that very briefly.

Tobias Carlisle  37:11  

I’ve got a question, Hari. When you told that story, I googled 1000 Indian rupees. Is that right? That equates to about $15? 

Hari Ramachandra 37:13 

That is correct. Yes. 

Tobias Carlisle 37:15 

And so, a 500 rupee note is about $7. Roughly half rounding down. So those are the biggest notes?

Hari Ramachandra  37:28  

Yes, so in place of a thousand, they’re releasing a 2000 rupee note. And in place of the old 500 rupee note, they’re releasing a new 500 rupee note. It just looks different. 

Tobias Carlisle  37:34  

Is the *inaudible* so they’re releasing and beginning at 2000 rupee note?

Hari Ramachandra  37:38  

Yes, so in place of a thousand, they’re releasing a 2000 rupee note. And in place of the old 500 rupee note, they’re releasing a new 500 rupee note. It just looks different. 

Tobias Carlisle  37:51  

How does that solve the problem? 

Hari Ramachandra  37:52  

The way I believe, the theory, I think Stig mentioned it in his opening, is that the people who are allowed to exchange now, I mean, if you’re exchanging your old notes with the new notes, or if you’re going in depositing your money to the bank, you probably have the white money or the money that is not corrupt [or] aren’t earned through corruption. It’s just not black money. 

And there are news in Indian channels that I’ve seen where it seems a lot of people are just throwing away the old notes, whether it’s a thousand or 500 denomination, or burning them, because they don’t have any use of it now, when they can’t return it to the bank. 

However, there have been questions raised as you exactly noted, [such as:] How does releasing a 2000 rupee note solve the problem of corruption, when we already had it with a thousand rupee note? So that’s something that we’ll have to wait and watch to see how it turns out. 

Preston Pysh  38:47  

Yeah, but I’m with Toby on this. If they swap out the cash that’s now registered, so like, let’s say I come in there with, I don’t know, whatever, we’ll just say 1000 rupees. And then, they give me the new currency which is cash. 

So that I just gave the bank 1000 rupees, which I’ll pay the tax on. But I’m only paying that one time, because now I take that thousand rupees that I got, and I can then give it to Toby and the government would never know that, and then Toby could give it to Stig and the government would never know that. 

It’s almost like it’s a one time tax on the swap of the cash, like, they need to convert it into a digital currency, so that it can always be tracked at that point. That’s where I think this is all going off the rails, but maybe I’m missing something. I might be totally missing something here.

Tobias Carlisle  39:33  

Is there another…there’s a money laundering arbitrage opportunity there, [when] an accountant wants to stop some guy going and buying some jewelry or gold or something that has unknown value. 

Then, I can go and find a guy who can’t transfer his money legally, saying to him, “Guess what? I’ll give it to you for 20 cents on the dollar or 10 cents on the dollar. That’s better than burning.” And then, I can go on, exchange it, and I can say, “I bought the gold. Got to hold the gold.” 

Hari Ramachandra  40:01  

Yeah, Toby, I think that that was a very good point. And there have been cases where people are trying to do such things. However, before they brought this D monetization policy into effect, a few months back or probably a year back, the Indian government had imposed restrictions on the amount of gold you can buy. 

If you’re buying more than, I don’t remember the number exactly, it might be 100,000 rupees worth of gold, which is probably like $2,000, you have to report the source of your funds. You will have to show your audited tax records and also, you have to present your…they call it, the PAN card number, which is similar to your social security number and all other details, and it will all be tracked. 

So if somebody wants to do this arbitrage, it will be tracked. And in fact, what is happening now is and one of the investors I follow in India is Professor Sanjay, but he recently tweeted an article where the article describes how the Indian government is using data mining and data analysis. Because now everything is digital. Everything is online. All the bank accounts are in the system. 

And there is a sudden increase of tax rates in India, tracking a lot of such activities that you mentioned and people are being caught. That’s another way that the government, I believe, was planning in a way because a series of steps happened before the actual D monetization. 

Number one, the prime minister announced a scheme where poor people can open bank accounts without any minimum balance, and they got thousands of bank accounts open through that. 

The second thing is they announced a one-time pardon. People with black money, where they can turn in their black money, pay a hefty penalty of 80% or 85% of the value. I don’t remember, but it’s something really huge [to] take back the 10% back home, saying, “Hey, this is white. Now, the rest is with the government now.” 

And that expired on September the 30th of this year. That deadline to pay a penalty and make your black money white. And then, on November 8, they announced this D monetization policy. I believe the prime minister has said that he has more schemes coming after this. 

This is like a piece in a big jigsaw puzzle. So there is definitely a roadmap to eradicate corruption. And I believe from what I have studied so far, this is one of the steps in the many steps that the government of India is working on. From what I see, there have already been a couple of steps before.

Preston Pysh  42:38  

Alright guys, hey, this is all we have time for this week for our mastermind in the fourth quarter. I want to talk about something really quickly here. If you were listening to our show last year around the May timeframe, you would have heard us do an episode on attending the Berkshire Hathaway shareholders’ meeting. 

So, we are doing this again this year. Toby Carlise, he already got his plane ticket. He is going. Hari, I didn’t ask you yet, but I know you’re going, correct? Yes, yes, he’s going. 

Stig is not going to be able to make it this year, but I will be there. And we are really excited to be hanging out with our audience, so we’re going to have a link on our website. If you go onto our website, and you look under “About Us,” there’s a section in there that you can attend live events. 

In there, you’re going to see a spot where you can sign up to go to the Berkshire Hathaway shareholders’ meeting. We will put out all sorts of information on how you do this. If you’re curious how you can go, because you probably think you have to own a share of Berkshire Hathaway, which is in the hundreds of thousands of dollars. That’s not true. You can actually attend the meeting by just owning a B share. 

Also, that’s $150-$155 right now. It’s the cost to own one share of stock and if you have that, you can go to the meeting. So if you want to go and I’m telling you, this is the ultimate event. We did a pub crawl last year. We had about…I don’t know how many people [were] there. There were a lot of people, and it was the time of our lives. We had so much fun. 

If you like talking about value investing, you want to network, this is the ultimate networking event. I promise you, you want to be in Omaha. So we’ll have information about that up on the site. We highly encourage you to go there and sign up because we’d love to see a whole bunch of you, and if you want to chat with guys like Toby or Hari or whoever, they’re going to be there so make sure you guys make it on out.

Stig Brodersen  44:32  

Okay, guys! That was all that Hari, Toby, Preston, and I had for this episode of The Investor’s Podcast. We’ll see each other again next week.

Outro  44:41  

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