Matthew Piepenburg (00:05:50):
And then following that period, I was very lucky to get out of that NASDAQ before it blew up in April of 2000, really, just because I saw all the writing on the wall, it was just overvaluation. So, luckily, I was able to get out.

Matthew Piepenburg (00:06:03):
And then with some of the revenues that we had made, I started investing in other hedge funds, and then got involved in a family office, where I managed a family office and later combined those funds into a multi-family office. So, I got a chance to look at hundreds of hedge funds and strategies. So, I became a former hedge fund manager into a hedge fund investor.

Matthew Piepenburg (00:06:22):
And along those many years, doing that, I got to know some people at some of the banks. I worked with my colleague at SignalsMatter, at Morgan Stanley. We put together a hedge fund on a Morgan Stanley platform. So, it was really accidental. And then my learning curve really grew after that first bubble. And the 20 years since that first hedge fund, I’ve either been investing in hedge funds or investing other people’s money in hedge funds, or looking at the markets in a much more sophisticated way than when I first started. Definitely, many boom and bust cycles since that first experience. But it was a crazy time.

Robert Leonard (00:06:53):
You wrote a book called Rigged to Fail, and your mission with that book was to help inform and prepare Main Street investors for potentially dramatic market risk and the opportunities that are ahead. First, what is a Main Street investor and what are the risks and opportunities that you see ahead for us as Main Street investors?

Matthew Piepenburg (00:07:14):
Main Street investor is the opposite of a Wall Street investor. In other words, a Main Street investor is someone who doesn’t make a living on Wall Street or have a professional inclination to read the Wall Street Journal three times a day, or look at market indicators every other 10 minutes, and doesn’t have the time or the resources now to get an MBA or a bachelor’s in economics now.

Matthew Piepenburg (00:07:33):
And so, a Main Street investor is often usually a very intelligent person. It could be a teacher, a dentist, a fireman, a lawyer, a doctor, who has 401(k)s or dabbles in the markets, but isn’t a professional investor or even necessarily super involved in it. Maybe they have a 401(k) that someone else manages for them and they ask questions every now and then for their advisor.

Matthew Piepenburg (00:07:54):
But a Main Street investor is, again, just someone who isn’t a professional investor, like my friends or my parents, or other people. And so again, they’re not unintelligent. They’re just not necessarily informed.

Matthew Piepenburg (00:08:05):
And I think the financial industry exploits the Main Street investor, particularly because the financial industry has this massive informational disconnect between what they show the world and what they really know. And I think they try and create this mystery that the markets are incredibly complex. There are lots of acronyms and strategies, and ideas, and macro and micro data points that only these super experts or the Oz behind the curtain could really understand.

Matthew Piepenburg (00:08:30):
And what I want to make sure that Main Street investors realize is it’s really not as complex or difficult as they think. And I think it’s my mission and Tom’s mission at SignalsMatter to educate or inform Main Street investors on the real key drivers in the markets and in their portfolios, because I think there are massive opportunities ahead and massive risks ahead. And I don’t think you need to hold your knees and hug your knees in the corner and just be a doom and gloom bear. And you also can’t be a naive, romantic optimist about what’s going on in the markets.

Matthew Piepenburg (00:08:59):
And what we try to do is just speak very plainly and bluntly about things that are very obvious, but not otherwise, I think revealed fairly in the mainstream media or even by your financial advisor, because there’s a certain consensus thinking in the financial, industrial complex of giving advice or buy and hold portfolios, or 60/40 portfolios, these kinds of passive investment strategies that have been the bread and butter of the industry for decades. There’s a lot of dangers in that, which we’ll talk about today. And they’re also a lot of opportunities, once you sift through the fog, this happy fog that the financial complex creates to create this mystery.

Matthew Piepenburg (00:09:36):
I think once you get past that and understand the key drivers in the markets, you’ll see the risk and you’ll see the opportunities much more clearly. That’s certainly our goal is to reveal those risks and opportunities. And we can get into those more in this conversation, but there certainly are risks at a market top like we’re seeing now. And there certainly are opportunities, especially for millennials, especially for millennials, because there’s a fantastic opportunity to eventually buy at a bottom rather than chase these tops, whether you’re a stock picker or a passive investor. And we can talk about that too.

Robert Leonard (00:10:05):
We talked about this in our last episode a little bit, but I want to talk about it some more. Before COVID-19 even started, you wrote, “Despite the most artificial and extended bull run in the history of modern capital markets, US and global exchanges are now poised to enter an equally historic and extended recession.” There’s no way you could have seen this pandemic coming, yet you still expected a recession anyway. Why is that? Why is the next recession going to be worse and longer than previous recessions?

Matthew Piepenburg (00:10:36):
Yeah. There was a lot of indicators pre-COVID, right when Rigged to Fail was coming out in the year that I was writing it. And then the month that I actually published it, the market was at an all time high the day the book came out. And then within a few weeks, it crashed. Obviously, as you said, we didn’t predict COVID-19’s impact.

Matthew Piepenburg (00:10:52):
A couple of things that we should caveat too. The recessions in bear markets aren’t the same thing. You can have an economic Main Street recession and still have a market bull or a market ripping to the north like we’re seeing right now. And the Dow just crossed 30,000 yesterday and then stayed there. That’s a big moment in the markets. It’s historical. I think it even made Wikipedia. And one day it just hit 30,000.

Matthew Piepenburg (00:11:14):
But going back to your point, why it was so easy to see that there was trouble ahead, even before COVID, when you were looking at the indicators in 2019, again, from the smallest level to the most complex level, there were so many signs that the Main Street economy, the real economy outside of the markets and within the markets, there was so many signs that there was so many perversions and problems. In a simple level, there was just even last Christmas, almost a year ago to this date, before COVID, Walmart sales were at record lows for that Christmas. It was a small indicator that Main Street was hurting already. They were not buying in the way they had in the past.

Matthew Piepenburg (00:11:52):
There were other things, I think retail sales were at a record low, they hadn’t seen since 2009 or 2008. That was not a good indicator on Main Street. So, those were small indicators, the economic level, the PMI index, which measures the manufacturing health of the economy was it low as it hadn’t since 2009. Again, this was pre COVID. This was late 2019. The fall of 2019, you were seeing brutal PMI numbers.

Matthew Piepenburg (00:12:18):
There’s another boring indicator called the Cass Freight Index, which shows transportation movement in the US. That was at record lows as well. So, there was a transportation recession already going on at the economic level, which is very recessionary.

Matthew Piepenburg (00:12:31):
In terms of the market, there were lots of indicators in the markets that were very disturbing, again, pre-COVID. And one of them was just the yield curves. Without getting into the complex discussion, but the yield curves are inverting, which meant you were getting less return for holding longer bonds than you were for holding short-term bonds. And an inverted yield curve for people who know this is a classic precursor to a recession. And seven of the last recession since World War II, an inverted yield curve was always an indicator of trouble ahead. And we had an inverted yield curve, pre-COVID.

Matthew Piepenburg (00:13:04):
We had the cyclical adjusted PE multiples of price to earnings ratios were at record highs that we haven’t seen since The Depression. It goes to 32. That just means you were paying far too much on the price of your stocks than what their actual earnings were. So, that was a real distortion. Stock buybacks coming into 2020. Again, pre-COVID we’re at record levels. And stock buybacks are incredibly distorted because companies use debt to buy back their own shares, that limits the size of the share pool and boosts artificially their earnings per share data. So, it gives an artificial confidence to the market. So, stock buybacks were really distorting the markets pre-COVID.

Matthew Piepenburg (00:13:42):
But as importantly, if not most importantly, there were signs that were so jarring at the end of 2019 at the Federal Reserve level, which is the ultimate elephant in the room or skunk in the woodpile, in my opinion, it’s the Central Bank. But as we saw in September of 2019, again, months before the first Corona headline came out, the repo markets had an absolute meltdown. And the Fed tried to poopoo that in the media as a glitch in the plumbing, that’s worth a whole podcast, talking about having the repo markets. Very complex without getting into it. The Fed was losing control of liquidity in the money markets and the repo markets.

Matthew Piepenburg (00:14:17):
The debt levels were getting too discouraging. There was a problem there that really the Fed couldn’t control when the repo markets all a one day spike of 10%. I mean, in other words, it went from 2% to 10%, the repo markets. That made the cost of debt among repo purchasers, incredibly difficult. It could have dried up the repo market. So, the Fed had to come in and print and produce loans and instant money, almost a trillion in a month to bail out the repo markets. Again, not something Main Street investors would really focus on, but for anyone on Wall Street, that was a glaring neon red flashing sign of, “Oh, oh.

Matthew Piepenburg (00:14:50):
And now within a month of the repo market’s crashing in September, in October, the Fed began quantitative easing again, or printing money out of thin air to buy government debt or treasury bills at the tune of 60 billion a month in October. And I remember I was fly fishing out in Utah. I stopped and did a quick video for my clients saying, “Risk on, the Fed is printing money again. They’re buying treasury bonds. The markets are going to go up. As barest as I am on the macros, the Fed just gave you a fat pitch. They’re going to buy treasuries. They are going front run the treasury market. They’re going to print money, create liquidity. And the stock market is going to rip up.” But that again was only a temporary move, I said, because when the Fed is acting desperate, because they’re nervous, and they’re nervous because they’ve lost control, and once again of the credit markets.

Matthew Piepenburg (00:15:35):
So, all of those things combined, from Walmart to the repo markets in late 2019, and frankly, throughout 2019, when I was pretty much risk on just because of Central Bank policy, there were so many glaring signs that trouble was ahead, from yield curves to repo markets, to like I said, retail sales and manufacturing. The economy was very, very sick. And of course, COVID came in and accelerated the speed of that. And the markets of course, tanked dramatically in March, and then I can talk about how they rose afterwards based on interest rates. But again, those were all indicators pre-COVID, that things were not normal pre-COVID. And even though we were thinking we’re going to get back to normal with a vaccine or when the virus runs its course, and there’s no normal to go back to. There’s a lot of reasons why that’s just sadly the case.

Robert Leonard (00:16:22):
Yeah. You mentioned that we had a big sell-off back in March 2020, which we did. And with everything that you mentioned leading up to that, I expected that to last longer. Why haven’t we seen the market sell off more due to COVID-19? It was relatively short-lived. Why is that?

Matthew Piepenburg (00:16:37):
It is remarkable and not sadly a surprise. I talked about a melt-up, even in the midst of the meltdown. I said, not to be glib, but if you provide an endless supply of bloody maries, you can keep the buzz going a lot longer than it should. Of course, when you take too many bloody maries and continue this perpetual bloody mary, a merry-go-round that the central banks have done really since 2009, even longer back, frankly, but really I think since 2009, if you keep providing those bloody maries, you can postpone the hangover, but by doing that, you only make the hangover much worse.

Matthew Piepenburg (00:17:08):
And so, what happened in March was, of course, we saw this massive crash in the markets that was short-lived. But you got to look at two key drivers behind this instant V-shape recovery. And it was basically monetary and fiscal policy at the monetary level. The central banks added the bloody maries. They brought the free beer, the free kegs to the party by printing unlimited QE, unlimited. So, October, they had the 60 billion a month for the treasuries. By March and April, May, and June, the Fed just threw in the towel and said, “We’re going to just print ad nauseum here.”

Matthew Piepenburg (00:17:41):
And so, the Central Bank’s balance sheet went from 3.5 trillion to 7.1 trillion this year. In other words, more money was created out of thin air by the Central Bank this year than in Q1, two, three and four from 2009 to 2014.

Matthew Piepenburg (00:17:55):
So, the monetary policy level, the Feds just through on the go crazy button with the free beer on Wall Street. So, that liquidity certainly was a massive tailwind for the markets. And it was just, again, more bloody maries, postponing, postponing, postponing the hangover.

Matthew Piepenburg (00:18:10):
At the fiscal level, I think the US was coming into 2020 at 23 trillion and change. Federal public that by the end of this year, we’re going to look at 28 trillion. So, we’ve increased our public debt by four trillion. A lot of that went to the CARE packages for the unemployed and for COVID relief. But the majority of that actually went back into Wall Street directly or indirectly.

Matthew Piepenburg (00:18:31):
So, the combination of extremely accommodative Central Bank money printing, and then debt and spend deficit, and spend by Congress in DC, certainly gave confidence to Wall Street to get one more keg party in or one more last [inaudible 00:18:45]. So, the markets reacted really, really quickly to that.

Matthew Piepenburg (00:18:49):
In addition, the Central Bank, which I think is a really criminal and important thing to keep in mind, this year, the Central Bank, wasn’t just buying uncle Sam’s IOUs or treasury bonds. They were buying direct corporate bonds in the US market. So, the Fed for the first time was actually buying ETFs, mostly corporate investment grade, but then slowly into junk bonds ETFs, and I guess commercial mortgage backed securities. So, the Fed was directly spending money to support bonds, keeping bonds bought artificially when no one else would buy them. And in addition to buying ETFs, the Fed started toe dipping into making direct purchases of individual securities like Amazon Inc and Visa, is if Amazon needed more support from the government or from the Central Bank.

Matthew Piepenburg (00:19:34):
But that combination of printing lots of money and then buying direct corporate ETFs, bond ETS, or buying individual names, I think it was only about 14 billion of direct individual name buying securities or bonds. That was just a drop in the bucket. But the Fed was signaling that, “Look, we’re going to keep doing this.” And that gave Wall Street a huge amount of confidence that to say, “Look, the Central Bank has our backs.” And so, that explains this V-shaped recovery. It was a tremendous amount of liquidity and direct support from the central banks and a little bit of help from Congress as well.

Robert Leonard (00:20:07):
Is all of that healthy for capital markets? Do you think it would have been better or “more healthy” for the drop that we saw to have been longer?

Matthew Piepenburg (00:20:16):
Of course. I think it’s extremely, extremely unhealthy. I call these the Frankenstein markets. And like Frankenstein, it’s a dead man walking, but it’s a very powerful dead man walking. If the Fed is going to literally buy securities or buy credit markets that gives them artificial life and it gives them a lot of power, you can’t underestimate the power of that kind of support.

Matthew Piepenburg (00:20:37):
And yet, I’m a big proponent of Austrian economics as opposed to Keynesian economics. Without getting into that though in detail, debt is very destructive. And Austrian economists like Von Mises or Shumpeter, talk about how it’s absolutely essential that you have what they call constructive destruction in normal free market, true capitalism. If there’s no natural demand for something, you have to let the prices fall. You have to let certain enterprises sectors, names, securities collapse because that’s a healthy economy. It’s a healthy market when over-indebted companies fall on their face. That’s how you weed out the men from the boys, or the good from the bad and the ugly. And in a natural market or free market system, that’s actually healthy, just like it’s not always healthy for a parent to give your child antibiotics every time they get a sniffle or a cough, because it kills their immune system.

Matthew Piepenburg (00:21:27):
And in a sense, the Fed just keeps providing unlimited antibiotics to an otherwise very, very unhealthy US credit market in particular. And by doing so, they just extend and pretend, and create a much bigger problem down the road. And I think the Fed has basically killed capitalism. That’s a dramatic statement. What we really do have right now is a Fed supported securities market. It’s basically Wall Street socialism.

Matthew Piepenburg (00:21:51):
The history of the Central Bank is a whole other episode too to discuss. But the Federal Reserve Section 13(3) of the Federal Reserve Act has a little emergency powers clause, which basically allows them to continue to buy and buy more credit instruments, more bonds. I think at some point, the federal will start buying stocks, not just ETFs, and not just individual bonds. That they’ll eventually have to actually start buying stocks themselves or equity ETFs to keep this market going. It’s an appalling thing.

Matthew Piepenburg (00:22:20):
But what the Fed in its desperate attempt to buy short-term recoveries at the expense of long-term economic growth, the Fed has forgotten history and it’s forgotten things as far back as David Hume’s 1752, he wrote an essay about this. He’s a mathematician. At some point when you have too much debt, you destroy any potential for economic growth. When your government debt hits a ratio, or once it crosses a 90% ratio of debt to GDP, you lose a third of growth. And now in the US we are at 107% or 110% government debt to GDP. Japan is over 200%. And if you look at both examples of both economies, regardless of the Nikkei or the SMP, you’re seeing absolute stagnation in the actual economy, while the markets rip unnaturally higher on the back of stimulus from their central banks. And that is not natural capitalism. It is not healthy, not only for the real economy, which is already on its knees. It’s ultimately not healthy for these bubble assets, risk assets, like stocks and bonds, which are increasing, it’s the open secret, they’re no longer connected to reality. These are incredibly overvalued markets.

Matthew Piepenburg (00:23:28):
The stock market is overvalued by PE multiples. Bond markets are so overvalued that we have negative yields on our sovereign bonds when you adjust them for inflation. And nominally in Europe and Asia, bonds are silver bots. They literally give you a negative return, which means they’re effectively a defaulting bond by definition. That’s just proof that it’s not bearish talk. It’s not doom and gloom groaning. It’s just empirical evidence that the risk assets like stocks and bonds are grotesquely correlated and grotesquely overvalued. That’s a danger to anyone in the markets.

Robert Leonard (00:23:59):
So, how do we explain this simply to somebody who’s new to the market or looking to invest? As millennials, we have people that want to start investing in. I tend to agree with a lot of what you’re saying. And the markets are ripping, right?

Matthew Piepenburg (00:24:16):
Absolutely.

Robert Leonard (00:24:16):
They’re going up. We see Bitcoin ripping. I mean, everything is doing so well this year, despite everything that you’re talking about. Yet, I still tend to agree with what you’re saying. But you have somebody new come into the market. And how do you warn them of these dangers while things continue to rip on?

Matthew Piepenburg (00:24:34):
I think it’s a great point. I think Bitcoin is a little different than say the stock and bond market, or stock picking. Bitcoin, as we talked about, I think before is a middle finger to the central banks, knowingly or unknowingly. Those who buy Bitcoin are saying, “Look, I don’t have faith in the US dollar or the Euro, or the yen, or the Yuan, or the peso. I don’t believe in paper currencies or fiat money anywhere in the world anymore, because we can keep creating them out of thin air. We can keep creating them through quantitative easing. It’s not a store of value.”

Matthew Piepenburg (00:25:02):
So, Bitcoin investors like gold investors, a Bitcoin is more of a millennial way of approaching the same problem. Gold is a more old school way of approaching the same problem. Bitcoin is just saying, “I don’t trust the central banks. I don’t trust monetary policy. And frankly, I probably don’t even trust my government or the dollar, but I spend.” So, Bitcoin, knowingly or unknowingly is a way to play that risk.

Matthew Piepenburg (00:25:24):
When you’re talking about risk assets like stocks and bonds, and millennials looking at the tech sector, and I’ve seen that movie before with tech stocks. Certainly, I was euphoric about tech stocks for a few years in the late nineties and did quite well by accident on those. But I think it’s what I’d tell my own daughter, who’s second year now at Goldman Sachs, and not drinking the Goldman Kool-Aid, but I say to her the same thing I say to any millennial, this is a great opportunity to watch a market peak, needle peak as they always do before they nose dive. And again, I’m not saying they’re going to nose dive next week or next month, or even next year, because there’s so much support for these markets.

Matthew Piepenburg (00:26:00):
You don’t want to fight the Fed, but you can’t trust it. But if you’re a stock picker, you darn well need to know when you’re entering and when you’re exiting. We’ve talked about this. If you’re truly a sophisticated stock picker, whether you’re a value investor or a growth investor, if you’re a value investor, you’re looking at the balance sheets and you’re hopefully buying low and selling high.

Matthew Piepenburg (00:26:19):
Right now, it’s very hard to buy low as a value investor because there’s no real value in these markets. Everything is so overvalued. But even if you’re a growth investor, you have to be looking at your DeMarker indicators, your Bollinger Bands, your resistance lines, your support lines. If you’re sophisticated, you don’t have to do that, fine. You can play the volatility, but most people aren’t. Most people’s 401(k)s aren’t. Most retirees aren’t that sophisticated or don’t have the time.

Matthew Piepenburg (00:26:43):
But it’s really not the time to be chasing tops, even if these tops can continue to last longer than they are right now. And there’s every good reason to suggest that they could. Central banks are powerful and you don’t want to fight them, but at the same time, you don’t want to let them take you over a cliff. At some point, you have to manage risks.

Matthew Piepenburg (00:27:01):
And I think for millennials, the rule number one, in my opinion, for making money on Wall Street, which I didn’t follow my first time, I just got lucky, but rule number one is you make money by not losing money. And secondly, you buy it bottoms and you don’t buy a tops, and you sell it tops. Right now is a clear top. And people are still buying. There’s still that fear of missing out. They’re still chasing like the Japanese do right before the Nikkei crashed in ’89, just chasing these tops. And truthfully, you can’t blame them. They’ve been reared in a market that for the last 12 years, every dip has been a buy, literally every time. And every time there’s a 10%, 20%, or even 30% correction, if you can pick a technical or fundamental entry point, you’re going to make money on the dip because the central bank is going to create an environment where markets are going to rebound.

Matthew Piepenburg (00:27:48):
Problem is as we’ve discussed, at one point, those dips aren’t going to bounce back. And you can’t always know. And my opinion is you don’t want to be all in at a market top, even if it’s not the top, because I think markets can go much higher than this, but they’re also going to go far, far lower, just on basic principles of mean reversion. So, that’s one way of looking at that.

Robert Leonard (00:28:08):
Yeah. We briefly talked about Carnival Cruise Lines last time. And when it fell, I think it fell 80% roughly. And that garnered a lot of interest by millennials. And a lot of people were asking me, “Should I dump all my money in Carnival Cruise Lines?” I don’t personally invest like that. So I said, “Listen, guys, I don’t invest like that. So, I’m not recommending anything. If you make this decision for yourself, but for me, I don’t invest like that. So, I personally wouldn’t do that.” But like you said, the dip came back. And if you did buy it at the lows, you did very, very well. And this time it came back, but next time it might not. And I don’t personally know when that time is going to be.

Robert Leonard (00:28:41):
So, it’s hard for me because a lot of people ask me, “Should I get in the market?” And another example is Tesla. People have been asking me for a long time, “Should I invest in Tesla?” I don’t invest in companies like that. And I don’t necessarily think that’s going to continue on. But it’s hard to give this explanation to people that are new to the markets when you also believe in what you’re saying.

Matthew Piepenburg (00:29:00):
Right. Because you have to ask yourself the answer to all those questions, from Carnival, to Tesla, to value to growth is sadly because it’s no fault of their own because we’ve been reared in a market in the last 15 years, last 12 years, where there is a sense of this big fat Fed air bag underneath everything. And there’s so much support for easy debt that companies can live on debt, grow on debt, have terrible balance sheets, continue to rip, or have no balance sheets, but they hit a new bottom. So, you buy that bottom because the markets will recover.

Matthew Piepenburg (00:29:28):
Natural market forces have been so distorted that people don’t know how to measure markets anymore using traditional measurements of risks, using traditional measurements of volatility. Now, it’s headline driven or Fed driven. So, it’s very hard to really understand how to look at a balance sheet or look at a trend line and use the old tools that before the Fed came in and distorted markets so clearly as they have now, that you could make reasonable assessments of risk.

Matthew Piepenburg (00:29:55):
Now, risk is pretty much taken off the table at the day-to-day level. Instead, we’ve replaced that with a much larger risk, a much greater risk of when this unsustainable debt levels, when this unsustainable support falls on its own face. And that’s very, very hard to time. In fact, it’s almost impossible to time.

Matthew Piepenburg (00:30:12):
Now, we’ve gotten so far from the fundamentals that you simply can’t know how long it can last. We’ve never seen this kind of intervention or “accommodation” or stimulus, or support by a central bank at this level in the US before. So, it’s thrown all the old measurements and old adages out the window. In that regard, a lot has changed in one way, but nothing has really changed.

Matthew Piepenburg (00:30:36):
Eventually, anything that’s overvalued blows apart. Eventually, that we’ll end horribly and we’ll see a massive correction in the markets, even with the Fed support. But until that time, it’s incredibly hard to time that. And so, you take your risks, I would just say, as I say to my daughter, wait for the bottom. If you’re going to be in the markets at all, put money in that you can afford to lose. Be very realistic about it and be patient. When you’re young, you can wait for that bottom. And it’s a macabre way of looking at things as you’re basically going through Baron Rothschild’s opinion of wait until there’s blood in the streets to buy. You may have to wait a long time for that, but there will be a point where markets will correct severely and you can buy Berkshire Hathaway or whatever you want. It’s 60 cents on the dollar, 50 cents on the dollar at a discount. That’s when you go long and you can make a smart buy.

Matthew Piepenburg (00:31:21):
Anything you’re doing right now is effectively gambling and trend following at this point, in my opinion, in the markets. They’re just not natural markets anymore. And to buy and hold now will work. A 60/40 portfolio will work as long as markets trend up on the tailwind of Fed support. And there’s a lot of reason that Fed support won’t last forever. And you can get caught on the wrong end of that. And that tailwind becomes a headwind. Markets can fall very precipitously and the central banks won’t be able to save you at that point. And then you take a 60%, 70% loss in your portfolio.

Robert Leonard (00:31:53):
After we last talked, and as I prepared for our conversation today, I read through your SignalsMatter’s report called What Lies Ahead: How to Navigate Extreme Markets and Extreme Monetary Policy. This is a fantastic 25 page report with a ton of great information. But the first line in the introduction caught my attention is one that I want to talk about. It says the key to any great portfolio is not only the investments it holds, but also the macro environment surrounding.

Robert Leonard (00:32:21):
Now, I’m not necessarily saying I disagree or that I write by any means, but I have tended to not focus on the macro environment much in my investing. Maybe that’s because I’ve primarily only been an investor during one of the greatest bull runs in US history, or maybe it’s because of Warren Buffett. I’ve studied him a lot. And he talks about how he’s a bottom up investor and doesn’t pay attention to macro or things like interest rates.

Robert Leonard (00:32:45):
So, my question is this, why might Warren Buffett be wrong? Why do millennial investors listening to the show need to be aware of the macro environment when making investment decisions?

Matthew Piepenburg (00:32:56):
You make a lot of good points. First of all, Buffett is a legend. He’s a great value investor. And I believe in his key rule, the two rules. What is it? The first rule is be patient. And the second rule is don’t forget the first rule. He is a legendary value investor for a reason. And I don’t think you can discount someone like Warren Buffett. Although, I say in a few ways, I strongly, strongly disagree with Warren Buffett, and that may be a blast for me in my position.

Matthew Piepenburg (00:33:23):
But I think first of all, and it’s like a Malcolm Gladwell book where he talks about sometimes the luck of the generation you’re born into, or the fates of the generation you’re born into. In a lot of ways, Berkshire Hathaway is a classic example of perfect timing, not to discount anything that Warren Buffett did because he understands financial statements. He understands free cash flow. He understands balance sheets. And he invested brilliantly early in the markets.

Matthew Piepenburg (00:33:48):
And Berkshire Hathaway’s portfolio is extremely well, but when you break it down, Berkshire Hathaway today is really not much more than an index. It’s an S&P index. It’s going to rise ridiculously well in bull markets. And it has been a bull market effectively for many, many decades, and certainly the last 12 years.

Matthew Piepenburg (00:34:06):
So, I think Berkshire and Buffett are being greatly rewarded. What the problem is, is that I don’t think Mr. Buffett really understand, I don’t think he understands, I don’t think he wants to accept that it is a new normal when you have this much central bank distortion, so that I and hold value investing portfolio that he has will do great as long as markets trend positively with support. But because the Central Bank has so distorted markets and created so much risk, Berkshire Hathaway is going to get hammered just as heavily in my opinion, as the S&P.

Matthew Piepenburg (00:34:39):
And I think for Warren Buffett, not to be looking at the distortions in the markets today, and to think that macros don’t matter is incredibly naive, even from Warren Buffett. And I’d love to have a one-on-one with him on this.

Matthew Piepenburg (00:34:53):
Macros are boring. And macros, by the way, can be horrible, while markets are still ripping up into the north for years. So, it’s easy to ignore macros because, hey, the markets are up. The Dow just hit 30,000. But as the Dow hit 30,000 yesterday, keep in mind that global debt is at 277 trillion. Global GDP is at 88 trillion. We have a three to one global debt income ratio. That’s a macro point. It may just seem like a number. It may just be a boring ratio, but it’s a disgraceful number in the history of capital markets going all the way back to Persia and Rome, to the 1700s, France to today. That’s a staggering disconnect between income and debt. That kind of debt is appalling.

Matthew Piepenburg (00:35:36):
US combined corporate, public and household debt is just crossed 80 trillion. It’s a simply unsustainable staggering disgraceful number. That’s another boring macro indicator. But trillions matter when you’re talking about that kind of debt. Globally, the value of the global equity markets are higher than global GDP. Those are dangerous, dangerous macro indicators. And yet markets can continue to go up.

Matthew Piepenburg (00:36:02):
And so, if markets are going up, so the Dow hit 30,000, and the S&P is breaking new highs, even though the world’s on its knees economically, it’s easy to ignore those boring macros. And I understand that temptation is very seductive. It’s always what happens though, before a bubble ends. The markets needle peak up, crowds get in, they’re sustained by group think. They’re supported psychologically by seeing positive headlines everyday on the markets. And so, they forget about these landmines all around them because they’re boring and complex, but debt is what destroys markets. It’s what destroys empires. And that can be years before you see the real tremors of that. In the meantime you enjoy the ride. But it’s like Titanic.

Matthew Piepenburg (00:36:43):
Look, today when people are talking about what they’re investing in Tesla, Carnival Cruises, arbitrage, growth value, they can have all these interesting, fascinating conversations that can be really compelling. That’s a great thing to do. It’s like being on the aid deck of the Titanic and saying, “Am I going to have lamb, or am I going to have duck? Am I going to have this dessert?” That’s a great conversation at dinner, but what you really should be looking at is the iceberg just off that bow. But if you’re not looking at that iceberg, you’re not thinking about it, it’s easy to get interested in the menu choices, like the security choices you’re making. And that can go on for years of just enjoying the menu and ignoring the iceberg.

Matthew Piepenburg (00:37:18):
But the iceberg is boring and it’s not talked about a lot in the media. But when you have 277 trillion in global debt or 80 trillion of US, corporate, household and government debt, that is a ticking time bomb. And the only thing keeping that time bomb from exploding is the Central Bank keeping the cost of that debt artificially low by printing trillions of dollars to buy unwanted securities, buy unwanted bonds. If you buy a lot of bonds, you keep interest rates and yields down. And that game of just low debt seems to actually work ad infinitum for infinity, because the Fed just prints, keeps pump prices up, yields and rates are down. They set rates low. The cost of debt is low. The cost of debt is low.

Matthew Piepenburg (00:37:59):
Companies are going to borrow to roll over debt to stay alive. There’s zombie companies. There’s $1.4 trillion right now in zombie company debt. Those are companies that have no earnings, no profits, can only survive by taking out a loan tomorrow to pay for yesterday’s obligations, taking out another loan next week to pay for today’s obligations. That is not a sustainable policy. It always ends eventually, but you can’t time when it does.

Matthew Piepenburg (00:38:23):
And if the Fed wants to keep forcing interest rates low, and printing money to buy US treasury bonds, they can play that game for a long time, but it’s a Frankenstein market. It’s a macro dead market. But in the meantime, the stock markets are ripping. The conditions are great for the stock market until that Central Bank policy fails. And when interest rates rise and we can talk about how they will, and I think they will eventually, but until that time, it’s easy to forget these things.

Matthew Piepenburg (00:38:50):
But to go to your question, macros do matter, but macros can be screaming warning signs for years before anyone listens. And in the meantime, markets are ripping. and macros, they’re confusing and they’re boring, and they’re nonsensical. And when you’re just looking at stock prices and profits, you forget that very easily.

Robert Leonard (00:39:08):
Some people that listen to the show are individual stock pickers, but there are also a lot who are just getting started and prefer to invest in index funds. Does a macro environment only matter for individual stock pickers or does it matter for ETF investors and those investing solely through their 401(k)s too?

Matthew Piepenburg (00:39:26):
Yeah, I think it matters for both. I think for stock pickers, if they’re sophisticated stock pickers, like it goes back to my original point, they’re looking at technical signals or they’re looking at fundamental signals. And so, if they’re sophisticated stock pickers, they may not be looking at that iceberg, but they’re certainly looking at their individual securities and knowing when to take profits, and when to get out. And that’s an art and a science.

Matthew Piepenburg (00:39:46):
For ETF investors, macros really matter and broad topics like ETFs themselves as instruments matter. I think it’s very important for 401(k) investors, whether they’re millennials or retirees, it’s very important to understand the embedded risk in ETFs. Stock pickers can assume risk and they have a profile to manage risks. It’s a little bit different than more 401(k) type investors of any age. 401(k) investors just do what their advisors tell them, which means a 60/40 portfolio of bond and stock ETFs of different sizes, growth value, corporate junk, all that. Those are highly correlated, dangerous portfolios, which we can talk about.

Matthew Piepenburg (00:40:25):
Like ETFs themselves are incredibly dangerous for a lot of reasons. In fact, Michael Burry, who was famous for his hedge fund in the Big Short, I think he’s described ETFs as probably the biggest risk in the markets. That’s a macro kind of conversation. Why are ETFs a big risk? At a macro level, they’re a big risk because there’s so much support from the central banks for these markets that ETFs are rising.

Matthew Piepenburg (00:40:48):
And also pension funds and sovereign wealth funds, and 401(k) advisors and managers have no choice, but to buy ETS, if you’ve got trillions of dollars or billions of dollars at the Ohio Fire and Police Pension Fund, or the Chicago Teacher’s Fund, they’re going to buy index ETFs, because that’s the easiest way to track the market. Or they’ll buy a tech sector ETF to get tech exposure.

Matthew Piepenburg (00:41:12):
But those ETFs are just a bag of marbles. Some of those marbles are good. Many of them are broken, but you buy the whole bag. When a sovereign wealth fund makes an allocation, it pushes the price of that whole bag of marbles up. That means even the bad marbles in that bag of marbles go up in price, just like ETFs would have a lot of different stocks piled into them. If a big fund buys that index is part of a pension fund or sovereign wealth fund, or retirement fund, or 401(k), all those stocks are going to go up together in price and ETFs become massively, massively overbought and overvalued. And again, those are wonderful looking at your 401(k) statements while things are going well, while the market is riding up. And you have to say though, when things go bad, those same ETFs are going to sell off much, much faster than they rose. They rise very slowly. And then they sell very precipitously and terrifyingly like we saw in 2008 or 2003. And that’s the danger.

Matthew Piepenburg (00:42:05):
And so, to your point, macros matter for those passive 401(k) ETF buyers, just as much as they do for stock pickers. In fact more so, because if the macros are telling you there’s an iceberg somewhere off the bow, it doesn’t matter if that iceberg hits tonight, at midnight or four weeks from now, or a year from now, or even four years from now, if there’s that kind of risk, you can’t just assume that when you hit that iceberg, you have a lifeboat, because if the macro risks are pushing ETFs to valuations that are beyond comparison in history, in my opinion, then when you have that dark night of the soul in the markets, those ETFs are going to sell off. That means your portfolio, your 401(k), your retirement account is going to get blistered. And unlike 2008 or 2009, we won’t be able to print another 10 trillion or seven trillion, or 28 trillion globally to bail you out. So you have to be thinking about that macro risk.

Matthew Piepenburg (00:42:57):
So, I do think macro is still matters, even though right now they’re largely ignored. It’s very easy, tempting, and frankly, comforting to ignore the macros right now, because the headlines are all in your favor for your bowl.

Robert Leonard (00:43:09):
I’ve heard that if we go back to 2000, the tech bubble, banks bailed out those companies. Then you go to 2007, 2008, 2009, the government or the Fed bailed out the banks. Now, the question is, who’s going to bail out the Fed or the central banks? What do you think about that?

Matthew Piepenburg (00:43:30):
Yeah, it’s an interesting development. All of those cases of bailouts are all the same symptom. You’ve got a debt binge, a credit market crisis, a liquidity crisis, and then a bailout. And the bailout is always creating money out of thin air, creating more debt to solve an existing debt problem. And you’re saying, well, who bails out the Fed? Does the buck stop with the Fed? And in a sense, if the Fed has a money printer in a basement, it can print theoretically forever and bail itself out.

Matthew Piepenburg (00:43:57):
What’s happening, and again, this isn’t making the headlines. It’s a macro conversation. It’s a boring thing. But what’s happening at the IMF and at the World Bank, the IMF just came out with a very, very disruptive new video on their website called the New Bretton Woods, but it’s not just a video full of euphemisms and horribly bad math, and lots of misstatements and untruths, but if you dig under the hood of that, what the IMF is saying, “We have a massive debt crisis.” They’re finally admitting that. “We have a debt crisis.” And they’re blaming it all on COVID, even though the debt crisis was there long before COVID.

Matthew Piepenburg (00:44:29):
But what the IMF is suggesting for is a new reset. They’re calling it a New Bretton Woods like we had in 1944 after World War II, as if COVID were comparable to the millions and millions of deaths and economic destructions of the Second World War, which I think is an insult to history to compare the two. But even if you believe COVID is as bad as World War II, which mathematically it isn’t, but the IMF is using this. They’re basically telegraphing and staging how they’re going to bail out the central banks.

Matthew Piepenburg (00:44:59):
And the IMF’s plan is to create basically a new kind of currency and a new global currency, just like Bretton Woods, the dollar became the global currency. The dollar was then backed by gold. So, it had some credibility. Nixon turned that in ’71. But the IMF is basically saying, “There’s so much debt. Here’s the solution. We’re going to create more debt and we’re going to pay for it with a new global currency.” They’re going to take away the special drawing rights that are existing now and create this new crypto currency government, central bank currency.” So, it’s the absolute definition of insanity using the same solution. It’s not solving the problem, and thinking you’re going to get a different result. In other words, the same policy, it’s just a little sexier. It’s going to be a new currency, a new crypto, and that could be five years or five months from now.

Matthew Piepenburg (00:45:44):
There’ll be like a Plaza Accord of Bretton Woods moment, where they’re going to blame this debt crisis on COVID, “And gosh, we have no choice now. We’re going to have to get together in the free world. And we have to figure out a way to reset our debt, create more debt solutions to a massively unsustainable debt problem. And to pay for that, rather than print dollars or euros, or yen, or yuan, we’re going to come up with this new central bank currency.” And that’s just putting lipstick on a pig. It’s a bunch of really fancy IMF overpaid bureaucrats coming up with a new idea that’s nothing new at all. It’s appalling. But be ready for that. Again, that’s a boring macro thing. It’s not making the headlines. It’s hard to really get your hands around, if you’re not an economist or someone that looks at the markets. It’s really nothing new. It’s nothing new at all. It’s just more debt and more printed artificial currency.

Robert Leonard (00:46:30):
Yeah. I remember the last one we talked, you had mentioned that COVID was almost a blessing for the central bank. Of course, global pandemic is not great for anybody from a health perspective, but from a fiscal policy, monetary policy perspective, it almost became a scapegoat for the central bank, because up until then, it had no reason. It knew it needed to do all of these things that you’re mentioning, but it didn’t have a reason to publicly back why they were going to do those things. Now with COVID, it can say, “Hey, this is why we’re doing it.” So, that’s a really interesting dynamic as well.

Matthew Piepenburg (00:47:02):
Yeah. I wrote a piece months ago about how COVID saved the financial markets. And again, this goes back to my point earlier that there was nothing normal pre-COVID. That’s how you could see a recession coming. And believe me, we are in a recession. I mean, so many data points to confirm that. But even pre-COVID, there was so many signs that we were in a recession or heading into recession. And more importantly, that our market was so overheated, something bad was going to happen. Bond markets were over-bought. Stock markets were over-bought. How was the Fed going to bail that out? How are they going to come up with another tap or 2009, 2008 bailout? That would not go well, I think for most average Americans, who are sick of seeing so much money go to bailout Wall Street or banks when they’re suffering at their Walmart purchases. That disconnect, the wealth disparity in America is so great now. It’s greatest since history, which is a crime. It’s a proof of the failure of our central bank system.

Matthew Piepenburg (00:47:55):
By the way, if you just look at the fact that the Dow is at 30,000 and unemployment is where it’s at today, and that 40 million Americans are out of work since COVID or the 3.3 million businesses have shut down, or the 40% of black-owned businesses have now shut down completely. How can you have that Main Street reality and a stock market hitting new highs? That’s proof that you have some kind of distortion. Whether you agree with me or not, you can’t deny the obvious disconnect.

Matthew Piepenburg (00:48:19):
But what happened with COVID it’s like Winston Churchill said, never let a good crisis go to waste. COVID created a humanitarian, legitimate humanitarian backdrop, just sliding a ton of liquidity back into the Wall Street, into the repo markets, into the treasury markets, into these liquidity machines that keep Wall Street going.

Matthew Piepenburg (00:48:39):
And if you actually look under the hood of the math, that where all that fiscal and monetary support went, the majority of it went back into Wall Street, and the markets and the banks, not to Main Street, despite the laudable efforts of the CARE packages and the PPP loans, and all those things. What really happened, and again, it doesn’t make the headlines, is you saw another TARP package written much larger. There was much more support for Wall Street, the bond and equity markets during COVID than there was during the 2008 financial crisis, adjusted for inflation.

Matthew Piepenburg (00:49:08):
So, behind the scenes of this horrendous global crisis, Wall Street got the bailout. It would never have been able to justify, but for COVID. And I’m not alone in that opinion. I’m not saying that the Fed created COVID, it’s not something like that. I’m saying, but because of COVID, they got a golden opportunity to bail themselves out yet again, because look at the trillions of dollars that have gone into the credit markets and the repo markets, and indirectly into the stock markets. And that explains again, why you can see an economy on its knees by every metric and a market reaching all-time highs. It really is the disgraceful disconnect between Wall Street and Main Street right now. And that never bodes well historically, for any society.

Robert Leonard (00:49:49):
I didn’t necessarily plan on talking about this next topic or even asking this question, but we’re talking so much about debt here that I feel like it could be an important question. And I don’t want this to get political by any means, but I’m curious to hear, the US has a huge student loan problem. That’s a huge debt for us. And there’s a lot of talk about that potentially being forgiven. And that’s sort of a type of buyout you could argue. How do you see that all playing out? Do you think it’s possible that student loans get completely wiped for everybody that has them from a federal level? If so, what does that do to the markets? And if not, where do we go? What is the solution to student loan debt?

Matthew Piepenburg (00:50:28):
That’s a touchy topic depending on one’s politics, because Bernie Sanders, of course, is notorious for that. And if you say that’s a good idea, then you must be extreme left. If you say that it’s a bad idea, you’re extreme right.

Matthew Piepenburg (00:50:38):
Just think about it, the student loan debt, I think is 1.6 trillion or something like that. It’s a staggering number. But when you think about what we did in the repo market, so what we’ve done in the treasury market, so what we’ve done for Wall Street in terms of the many trillions. And really who does that benefit? I mean the repo markets and the money market accounts don’t benefit Main Street that much. Yeah. We bailed them out to the tune of over a trillion dollars. If you had taken that same amount of money and bailed out student loans, it’s my opinion that if you’re going to bail out anything, if you’re going to give a handout, I would much rather give it to a generation of students saddled with so much debt that they can’t think straight and they can’t make decisions.

Matthew Piepenburg (00:51:14):
And that’s not because I’m trying to make a political statement to get the support of millennials, but it’s criminal, how much it costs to get an education in this country compared to where I was for the last six months in Europe, where there’s nothing like that. Now ,there are big differences and reasons why, and I understand professors in universities in America are exceptional and they need higher salaries, but there’s really no explanation for the type of costs for medical and for educational systems. It’s a broken system.

Matthew Piepenburg (00:51:38):
So yes, even if you’re going to give a million, or excuse me, a trillion to student loan debt, which would cover most of it, that would be money much better spent than giving it to the repo markets or add more liquidity for banks to continue to live on fractional reserve banking.

Matthew Piepenburg (00:51:53):
So, I’m not trying to criminalize the banks and make Wall Street, always the bad guy, and the little guy, always the good guy, but there’s no doubt with the amount of money we’ve given to Wall Street in the last 12 years, if we had just bailed out 60% of student loans, I think that have been much better spent.

Matthew Piepenburg (00:52:08):
By the way, for every member of Congress, there’s four financial lobbyists who push an agenda that favor Wall Street, that’s neither red nor blue, that’s just an empirical fact. The fact is our Congress has been co-opted by financial industries for years. So, you’re not getting true representation in your House of Representatives or your Senate, whether that’s Democrat or Republican, they’re bought and paid for. And that’s just an objective fact. That’s not an opinion being anti-Wall Street. Hell, I’ve benefited being a member of Wall Street for over 20 years. It’s just, you’ve got to call a duck a duck at some point.

Matthew Piepenburg (00:52:41):
So, I think a lot of politicians and certainly the Fed’s master is Wall Street. It’s a private bankers bank. It’s not even a government institution, even though it sits on constitutional land. I would argue it’s not even constitutional, but that’s another story altogether. But the Fed does not serve the Main Street economy. Its job is to provide liquidity to banks. That’s what it was formed for. It’s a banker’s bank.

Matthew Piepenburg (00:53:01):
The Fed, and Congress, and even the White House, Republican or Democrat for many, many years has not used the Fed to bail out the real economy. It’s always been for Wall Street because politicians and of course, central bankers by their nature confuse the real economy with the stock market, which again, explains why stock markets can be rising as the real economy is on its knees. I think that’s a short-sighted political need to stay elected by promising short-term solutions. Short-term can mean another 10 years of rising markets or five years of rising markets. That’s very politically popular to deficit spend or print money in your jurisdiction, or your precinct, or your electoral college to say, “I’m going to promise you a robust economy.” They’re giving you a robust stock market and they’ve confused the stock market with the real economy. That’s a dangerous game. It looks good on paper for now. It looks like a living organism, just like Frankenstein, if you put a tuxedo on him and put him in the corner of the room, doesn’t look like a monster until he gets up with his arms out.

Matthew Piepenburg (00:54:00):
But eventually our economy is a Frankenstein. Our market is definitely a Frankenstein. It’s completely artificial. But I think if we spent more money on infrastructure, on debt relief for students, who could actually go and buy a house or a car, and qualify for a loan. With interest rates at the basement of time, why are millennials buying more houses? Because they can’t afford the houses, even at low interest rates, because they’re in so much debt, they can’t get a loan or they can’t save enough money to put a down payment down. And real estate prices like bond prices are completely blown off. The charts are overvalued, because any instrument that survives on low interest rates goes up in price, if rates are low.

Matthew Piepenburg (00:54:37):
So, people who’ve put fancy face shots on their brokerage cards, real estate brokers are making a fortune right now because cost of debt is cheap. But millennials and most people can’t afford even a low rate mortgage because they have so much student loan debt. Or if they’ve defaulted on that debt or behind on that debt, they can’t qualify for a loan.

Matthew Piepenburg (00:54:54):
So, it’s a long-winded way of saying, yeah, without getting too political, certainly a big portion of student loans could be forgiven. That would be better for America than one more bailout for Wall Street. That’s my short answer then to that.

Robert Leonard (00:55:06):
Going back to our conversation about 401(k)s, there’s a relatively limited management capability for us in employee-sponsored 401(k) accounts. So, how can we best position ourselves for what you’ve been talking about throughout this episode to help mitigate the risks you see?

Matthew Piepenburg (00:55:23):
Again, this goes back to the point, first of all, if you’re in a 401(k), you’ve got a plan administrator, who’s probably put you in a 60/40 pie chart portfolio or a 70/30. That means 60% stocks and 40% bonds, or 70% stocks and 30% bonds depending on your age, with the idea being that bonds will protect you when stock markets crash. So, you need those bonds to be your buffer. So, we’ll give you a nice pie chart portfolio.

Matthew Piepenburg (00:55:47):
The first thing I’d recommend in any 401(k) thing is to question very severely the intelligence of the old traditional 60/40 portfolio. Even banks like JP Morgan now are admitting that those probably aren’t the safest things. And the reason that’s the case is, stocks and bonds are so highly correlated now. They’re both bubble assets now because of all these distortions we’ve talked about. The Fed has supported or front-run the bond market for so many years that bonds are so overvalued that they’re not really a protective safe haven asset like they used to be. And stocks, of course, are bubble assets as well. So, if we have a market risk moment, your bonds and stocks are going to go down together.

Matthew Piepenburg (00:56:25):
So, the first thing I would recommend is that you don’t think of bonds as a safe haven. Certainly, not the way they were in my dad’s era or your grandfather’s era, or even in my early era. Bonds just aren’t the protective asset they used to be. They’re highly correlated. So to me, a 60/40 bond stock portfolio is basically a correlated portfolio. So, that’s the first thing.

Matthew Piepenburg (00:56:44):
The second thing that I would recommend is that they have some allocation to cash, even though inflation is coming, even though there are risks that you’re losing the purchasing power of that cash, you want to have dry powder for whenever this fantasy market of central bank support has its disruptive moment. Again, without trying to time that, you want to be able to buy Berkshire Hathaway at 50 cents on the dollar. And I think you need to have cash to protect yourself, A, from the volatility, and B, to buy when markets are showing blood in the streets. And so, you buy at value.

Matthew Piepenburg (00:57:18):
For a 401(k), you can’t just say cash, but you can put it into a money market or some type of cash equivalent. Most 401(k) programs add some type of cash equivalent.

Matthew Piepenburg (00:57:28):
And at SignalsMatter, we show you how to diversify that portfolio beyond stocks and bonds. You need to be looking at commodities, precious metals, currencies. And you have to be actively managing that, not everyday day trading, but every quarter, every month, or even sometimes every couple of weeks. As conditions and facts change, your portfolio has to change. This idea of just passively sitting back and biting a stick through downturns, and then riding the wave through upturns was the old method. Those days are gone. Now, we’re going to see many, many months up into the right until things go really wrong again. And if you’re in a passive portfolio and you’re not watching it all the time, you’re at risk.

Matthew Piepenburg (00:58:06):
I think that the simplest answer to your question, Robert, is A, avoid a stock-bond-concentrated portfolio. They’re too correlated. That’s very dangerous. And B, make sure you have a strong allocation, 30/40, even 50%, depending on your risk in a cash equivalent, like the money market account, just so that you have, A, that prevents you from losing everything, if there’s a 40%, 30%, or 60% reversion. And B, that when markets do hit a bottom, which you’ll never time the bottom, but you’ll know it When you see it, when markets really start to go back to their old support lines, you can buy then, and then you can set it and forget it for decades.

Matthew Piepenburg (00:58:41):
You want to wait for a bottom. If you’re 70 or 80 years old, you can’t wait for that bottom, because if it takes 10 or 20 years to recover, you may not be here. If you have a retirement account, you can’t afford to be all in right now at a market top. It’s not the market top. It’s certainly a top. It’s been a top for over a year and a half. But again, I would still be gladly in cash rather than chasing this top all in right now.

Matthew Piepenburg (00:59:04):
And you want to talk to your advisor. Again, I’m not pitching SignalsMatter, but we build portfolios that are far more diversified and uncorrelated than just stocks and bonds. And you’ve got to be thinking about other asset classes.

Robert Leonard (00:59:16):
I want to go back to that 25-page report, I mentioned a little while ago, and talk about a few more concepts from it. For anyone that’s interested in this report, I’ll put a link to it in the show notes. But in the report, you talked a lot about interest rates. Without getting too into the weeds, explain to us millennial investors, what has been the interest rate environment for the last decade and what has been happening?

Matthew Piepenburg (00:59:38):
Well, for the last decade, it’s been a historically low-interest rate environment. And again, it’s not your fault. Your generation or anyone in the last 10 years, wouldn’t even know what high-interest rates look like because the Central Bank, A, has set rates near zero, since 2008. And B, they’ve been buying bonds. The Fed can set low-interest rates artificially.

Matthew Piepenburg (00:59:57):
To me, the bond market is more important than the Fed, but even the bond market is distorted. The other key interest rate that I would look at is the yield on the 10 year treasury because the higher that yield goes, the more and more dangerous it gets for the markets.

Matthew Piepenburg (01:00:09):
The yield on the 10-year treasury in 2007 was 5%. Today, it’s less than 1%. So, you have this very, very low rate environment. And why is that dangerous? Well, right now it’s fantastic because low rate again is the cost of debt. If the cost of debt is low, companies will take on more debt to survive and they’ll buy back their shares, et cetera. They’ll use debt rollovers.

Matthew Piepenburg (01:00:30):
So, a low-rate environment is fantastic. It’s a very important indicator. I look at the yield on the 10-year that starts to creep above 2%, 3%, 4%, the party is over. But right now, the Fed is effectively repressing that yield by buying artificially with printed money, government bonds. When that starts to end, we can talk about how that ends, but until it ends, markets will continue to be survivable. It’s like if six-packs were only a dime in college, everyone would buy more six-packs. When interest rates are set low like this at the zero bound for over a decade, well, companies are going to be seduced by all those six-packs. They’re going to go on a debt addict binge. They’re going to go on a keg party because they have no choice. It’s too easy. You can just keep borrowing for so cheap. Keep borrowing. Keep buying back your shares. Keep issuing dividends on borrowed money. Keep rolling over debt, extend and pretend. Stay like a zombie and just wander through the markets.

Matthew Piepenburg (01:01:24):
So, interest rates are absolutely critical. I think they’re the most critical thing. And the Fed is saying, “Don’t worry. We can repress interest rates forever and we can outlaw inflation. So, trust us, we’ve got your back.” And again, the Fed is a powerful, powerful force, so is the Bank of Japan or the Bank of England, or the ECB. So, you can see why it’s easy to trust that, especially when markets are hitting new highs.

Matthew Piepenburg (01:01:45):
I would argue that the Fed can’t keep interest rates down forever. And so, that experiment, that fantasy will end. I don’t know when it will end. But the way I watch it slowly die, as I watched that yield on the 10-year treasury, as it creeps above two and a half percent, 3%, which right now people think is never going to happen again, and I understand why, but Fed can control that, but once the yield on that 10-year, that cost of debt, the cost of that keg, cost of that six-pack, once it gets higher and higher, the party gets slower and slower. And the hangover approaches.

Robert Leonard (01:02:17):
Explain to us why you think this trend of declining interest rates can’t continue anymore and why interest rates will rise in the future.

Matthew Piepenburg (01:02:25):
Maybe it will rise, eventually. I think it’s very hard to say when, because like I said, as much as I’m appalled by central bank policy, especially since 2008, and as much as I can understand how is a short-term emergency in 2009 to apply that policy, they’ve gone too far, they’re addicted to it.

Matthew Piepenburg (01:02:43):
So, the Fed can continue this low rate policy for a long time. And I don’t know, precisely when it will end. No one really does. And I think anyone who tells you they can time the markets is not much better than a tarot card reader. But I think why it will end or how it will end is very simple.

Matthew Piepenburg (01:02:59):
The bond market ultimately has more say over interest rates than a central bank. The hubris and arrogance of central bankers to think they could control the bond market, like a surfer thinks he can control a tsunami. You can be a great surfer, a great sailor, but you have to have respect for the ocean. The force of the ocean, humble the best water men on the planet. And the central bank is like a sailor that thinks they can control the Pacific or the Atlantic. That’s incredible arrogance.

Matthew Piepenburg (01:03:26):
And the power, that natural forces, the ocean like the natural forces of the bond market, I think will break the back of these central banks. And by that, I mean, at some point a sovereign wealth fund or a major pension fund, somewhere in the world from Singapore to London, to the US is going to say, “You know what? For all these bonds that I have on my book, I’m getting no yield. In fact, inflation adjusts, and I’m getting a negative return. There’s not enough yield for the risk on my bond books. So, I’m going to start selling my bonds and my treasuries. And I’m going to start selling my 10 years and my 30-year bonds.” There’s going to be a sell-off in the bond market.

Matthew Piepenburg (01:04:01):
And so, when the bond market sells off, the bond prices go down and yields go up. And when yields go up, interest rates go up. And the Fed is going to have a moment of, “Oh, oh.” When that happens. And their only choice at that time will be, “Well, nobody is buying these 10 year treasuries. We’re going to have to print trillions more to buy them.” And I think at some point, the world is going to say, “We’re not buying that anymore. We’re not going to accept that.” That’s a psychological and mathematical moment that is very hard to time, but that’s one way. I think the bond market simply says no to monetary policy. Investors start to realize there’s just not enough yield for the risk of holding these artificial monsters, zombie Frankenstein bonds. That’s one way.

Matthew Piepenburg (01:04:43):
The other way is, look, inflation is eating away at your returns. The central bank and the Fed, and the Bureau of Labor Statistics says, inflation is around 2%. The Fed wants to target higher. Suddenly they have the magical ability to turn inflation up. That’s all nonsense. But real inflation is much higher than 2%. It’s closer to 10%, shadow stats, or the SGN alternative. Everyone knows how college tuition is a classic example of inflation. As I said, the toll, the GW Bridge is a classic example of inflation. What it costs to see a dentist is a classic example of inflation or any of these other costs that we all live with every day. But the Fed keeps telling us, well, we only have 2% inflation. But the point is, at some point, inflation will increase. And when inflation increases, people will see that their inflation-adjusted returns are getting nowhere in their bond markets, so they’re going to sell more bonds. Another reason that bonds will sell off and rates by the bond market will go up higher than what the Fed can control.

Matthew Piepenburg (01:05:39):
And a third reason I think that inflation is coming or that rates are going to rise slowly and then surely, is that the Fed is now, as I said earlier, going from being a lender of last resort to a spender of last resort. And right now the Fed has started in 2020 to actually use its powers to directly buy ETFs. And they will soon buy stocks and not just bonds. And they’ll soon buy individual name stocks like they’re buying individual named credits.

Matthew Piepenburg (01:06:07):
When the Fed starts to slowly inject money directly into the markets, into the real markets directly, rather than just buying treasury bonds, that increases the velocity of money. When you increase the velocity of money, you increase inflation. The Fed thinks it can control inflation at 2%, like a sailor thinks that he can control a wave to only be two meters instead of 10 meters. But they really can’t. That’s arrogant.

Matthew Piepenburg (01:06:29):
Federal lie about how high inflation is, but eventually we’ll all realize we’re feeling inflation. You see a 20-foot wave, you know it’s a 20-foot wave, even if someone next to you says it’s only a two-foot wave. You’re probably going to drown. And that’s what’s going to happen.

Matthew Piepenburg (01:06:42):
And more importantly, as the Fed or any central bank tries to print more money to buy otherwise unloved or unwanted bonds, they’re going to kill the purchasing power of their underlying currency. Again, that’s why Bitcoin or gold are so successful right now. If you look at the purchasing power of the major currencies in the world, including the US dollar against say a milligram of gold, the purchasing power of every major currency is consistently going lower and lower. I’m not talking about the power of the dollar relative to the power of the Euro, or the strength of other currency. I’m talking about the actual purchasing power of the underlying currency. It’s getting crushed. And that’s why investments like Bitcoin or precious metals are going to be ultimately the best hedge against these central bank policies. That doesn’t mean you have to be a Bitcoin bug or a gold bug. I personally favor gold over Bitcoin for a lot of reasons, but that’s my opinion, but they’re both, as I said, a middle finger to dying currencies and over-exuberant central banks.

Matthew Piepenburg (01:07:42):
And so that too, as currencies lose their purchasing power, that’s another reason to lose faith in the bond market. And as bond market faith disintegrates, bond yields go up, interest rates go up. So, I do think at some point there’ll be a disorderly spike in interest rates like we saw in the repo markets at a small example, you’ll see that in the overall markets. And if interest rates go up again, if the cost of beer goes up, there’s going to be less parties at the frat house. If the cost of debt goes up, there are going to be less parties on Wall Street. And you can’t keep that cost of beer for free forever, in my opinion, it’s just a question of when, not if.

Robert Leonard (01:08:17):
Some people listening to the show, hear all this talk about interest rates and might be wondering, what interest rate we’re even talking about? When I first started studying finance and the financial markets, I didn’t know the difference between the interest rate on my savings account and the interest rates we’re talking about here. So, I think it’s a very valid thought to be having. So, please tell us which interest rates we’re even talking about here.

Matthew Piepenburg (01:08:39):
Yeah. I mean, the two most important ones I’m talking about here, like I said, is the Fed funds rate. That’s the rate that the Fed sets for short-term bonds. It’s kind of the guidepost of where the cost of money is going to be for banks when they’re making interbank loans or the Libor rates on corporate loans. With the Fed funds rate is the interest rate that’s really critical for keeping liquidity or the cost of debt going in the financial market.

Matthew Piepenburg (01:09:02):
So, when I’m talking about interest rates, I’m talking about the rates that are set at the Central Bank or the Federal Reserve, but also, as I said, that’s the official rates set by the Fed. And that becomes the rates that banks use to lend among themselves. And then that becomes what the rates that banks then send out to their customers, their corporate and institutional clients, and their private clients. So, that central bank Fed funds rate is extremely important.

Matthew Piepenburg (01:09:27):
But as I said, if the yield and the 10-year treasury get too high, the Fed will have to respond to that. The Fed funds rate will eventually reflect the bond market, not what Powell or Yelling, or Bernanke, or Greenspan, or the next Fed chairman sets of that.

Matthew Piepenburg (01:09:41):
So, those are the two key rates that I look at, the Fed funds rate, which is the official cost of debt for banks, and then the 10-year treasury yield, which is the real interest rate that everyone really follows globally, because of our global currency status. When you talk about your rate on your savings account, which is probably less than 2%, that’s appalling, that’s so low, but that’s not really the rate I’m talking about when I’m watching the interest rate.

Matthew Piepenburg (01:10:05):
When you think about it, when rates on your savings account are so low, then what does that encourage people to do? It encourages them not to save. So, they’re going to go out and spend. This is a direct initiative or intention of the Central Bank is to make it nearly stupid to save money, because you’re going to get no return on your savings account. But my point is, at some point, the same thing with your bonds, you’re getting no return for your bonds, you’re going to sell those. When that happens at a concentrated systematic level, at an aggregate level, that’s when yields will rise. And that’s when the Fed will lose control of the Fed funds rate. And the real market is the bottom market that will determine the direction of what banks will charge, and what banks will ask for an interest rate. So, those are the key indicators I look at when you’re talking about interest rates, I’m really talking about that the yield on the ten-year treasury and the Fed funds rate.

Robert Leonard (01:10:51):
We’ve had a great conversation today about the financial markets as a whole. But to round off the show, I want to get a little bit more granular, talk about you personally, Matthew. What has been the most influential piece of advice you’ve ever received? It can be about business. It could be about investing, even just life in general. What piece of advice has had the biggest impact on you?

Matthew Piepenburg (01:11:13):
I’ve had so many great mentors, academically, the books I’ve read, teachers I’ve had, professional mentors. I’d like to say something famous from Emerson on self-reliance or William James Bryant.

Matthew Piepenburg (01:11:26):
The best pieces of advice I had were two things. One is just a famous quote by Kennedy, who said, there’s something immoral about abandoning your own judgment. And I think if you’re going to have a judgment about anything, whether it’s politics or markets, or love, or religion, you have to have an informed judgment. And then once you have an informed judgment, you have to stick to your own opinions, your own values, your own judgment. If you abandon your own judgment, there is something wrong with that.

Matthew Piepenburg (01:11:53):
Another great piece of advice is don’t wait for the meaning of life, create the meaning of your life. So, you have to take an active role in how you make a life. And you have to take an active role in how you make decisions. And that’s based on your own judgment. And how that really ties into investing is it’s almost the same thing as being a contrarian. It doesn’t mean being a contrarian for contrarian sake, but the more informed you are, the more informed your judgment is. The more informed your judgment is, inevitably, it’s going to be unlike the majority of people’s opinions, because it’s an informed opinion, as opposed to a mass opinion or a consensus opinion.

Matthew Piepenburg (01:12:26):
And all great investors, including Warren Buffett or Howard Marks or Baron Von Rothschild, were ultimately contrarians, not just because they wanted to be different, but because they had more information. And as they got more information, they became better at what they did. And investing is no different. As you understand risk, and you understand interest rates or macros, or even something, stock-picking side, the more informed you get, the more you trust your judgment, the more powerful your confidence is, in any area of life.

Matthew Piepenburg (01:12:55):
And the markets it’s no different. You’ve just got to get more informed. You can’t have someone make decisions for you. It’s your money. It’s very important. It’s your investments. It’s your retirement. Don’t rely on a FINRA Series 63 registered financial advisor dejour to give you the same advice that everyone from Goldman Sachs, the guy down the street is going to give you, a set and forget it portfolio. They’ll take a fee on it. When the markets tank, they’ll blame it on some external event. And they’ll just say, “Bite a stick and ride back up.” That’s consensus thinking. That’s not informed thinking. That’s abandoning your own judgment for someone else’s judgment. And I think that’s lazy thinking.

Matthew Piepenburg (01:13:31):
It doesn’t mean you have to just be a doom and gloom radical, just to be sexy. You’ve got to actually be informed in your opinions. You don’t have to agree with the thing I’m saying, but check on what I’m saying and make your own informed opinion. I actually enjoy having conversations with people who have different opinions than me, because I’ll change my opinion if they inform me differently.

Matthew Piepenburg (01:13:49):
But to answer your question, don’t abandon your own judgment, but make sure your judgment is very informed. I think that’s the best advice I was given, is to be self-reliant, but also self-reliant based on doing the work to improve your own judgment and your own understanding of a given topic. So, you actually have an informed opinion instead of just an opinion.

Robert Leonard (01:14:10):
Matthew, thanks so much for joining me again today on the Millennial Investing Podcast. I’m already looking forward to doing this for a third time. We’ll do that probably again in a couple of months. But where can everyone listening today go to learn more about you and all the work you’re doing?

Matthew Piepenburg (01:14:26):
Signalsmatter.com is where Tom and I give portfolio advice, and there are tons and tons of blogs. And there’s The Investment Primer that you’ve referred to. It’s on there, that people can download. It’s all free. It’s all free. Most of the stuff on the website is front-end information. You can improve your information and judgment just by reading a lot of those reports. You can disagree or agree with them, but you’ll at least have, I think a more blunt understanding.

Matthew Piepenburg (01:14:49):
If you want to have more specific portfolio advice, whether it’s your core portfolio or specific ideas to invest in other sectors, you can become a subscriber. My colleague, Tom Lott, he’s fricking genius on the back end with all kinds of signals and sectors, and securities to invest in. And that’s for paid subscribers. But for anyone who just wants to stay informed, there’s a lot of free information right there on signalsmatter.com.

Matthew Piepenburg (01:15:12):
And then in my other life, I love the two dimensions of my life, because SignalsMatter was really created for Main Street investors like you said, but I come from a family office background and a Wall Street background. And my other life is in Zurich, Switzerland, where I work with Matterhorn Asset Management, which is for higher net worth investors, but that’s purely precious metals. We are the biggest private vaulting service for precious metals, high net worth investors in Zurich and in the world, but we’re based out of Zurich. And that’s called Matterhorn Asset Management. And that’s where I talk more about the specifics of currency devaluation, what’s happening with central bank policies around the world, what that means for your wealth management in terms of just whatever currency you own. And so, we solve that problem with high-grade, highly refined gold and silver products in Switzerland. And then we store it in Switzerland, Singapore.

Matthew Piepenburg (01:15:58):
So, for precious metals, I’m in Zurich. For securities and for stocks, and bonds, and portfolio questions, and for Main Street information, for free, signalsmatter.com is where you can find me there. And of course, Rigged to Fail is on Amazon. You can get the book pretty much for free on amazon.com. Read it, agree with it, disagree with it, but it’s full of a lot of good data points. And that’ll help improve your informed judgment on these markets right now.

Robert Leonard (01:16:24):
I will put a link to the book, a couple of the different reports we talked about throughout the episode, and all the different resources that Matthew just mentioned in the show notes below. So, if you guys are interested, be sure to go check those out. I’ve read through a ton of the blog posts. I’ve read through the book. I’ve read through everything. I really enjoy it. I know you guys will too. So, I highly recommend you go check those out. Matthew, thanks so much for joining me.

Matthew Piepenburg (01:16:45):
Okay, buddy. Well, thanks for having me. I really enjoyed it. It’s always a pleasure.

Robert Leonard (01:16:48):
All right, guys! That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (01:16:55):
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