Ben Hunt, the co-founder of Second Foundation Partners, joins Albert for a wide-ranging conversation on economics and investing. Hunt believes that it’s time for investors to “dust off’ their investing playbooks from the 1970s.

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SHOW TRANSCRIPT (edited)

Albert Lu: My guest today is Ben Hunt. He’s the co-founder of Second Foundation Partners, the publisher of Epsilon Theory, an online source for financial market commentary.

Thanks very much for joining me today. How are you?

Ben Hunt: It’s great to be here. Thanks for having me.

AL: Ben we met, sort of briefly, a little over a year ago at the New Orleans conference, when I was moderating a panel that you participated in with Peter Schiff and Mike Larson. I thought your ideas were very interesting. Unfortunately, we were sharing the time, of course, with other people. I didn’t get a chance to delve deeper, so I was hoping to take this opportunity to delve deeper into your thoughts and maybe how they’ve changed in the last year and a half for my own edification. I want to say, as we start, that I wasn’t familiar with your work prior to New Orleans, so in preparation for that panel I did do a little homework and came across your interview with Grant Williams of Real Vision. I’m a big fan of Grant and what he and Raoul are doing over there, and I thought it was just a splendid interview, really nice.

Maybe share with the viewers first what you do, but also your background as what you called, I think, a dilettante farmer. Get into that a little bit.

BA: That’s me. That’s me. You know, I’ve done a lot of different things in my life. You know, my wife says I can’t keep a job. So that’s what’s been the, I’ll say, the strand that goes through all of them — trying to be … I’m a puzzle solver. I like to figure out puzzles. And, you know, I started as an academic. I got my PhD in political science, of all oxymorons. And because they’re trying to figure out the puzzle of, you know — how do countries interact with each other, right, or how do voters, as in sort of the behavior of crowds, how does that work? And, for ten years I was in academia — I was a professor. And, you know, the issues I wrote on — the research I did was trying to figure out how are crowds, in this case, voting crowds, how are they impacted by the words we hear, the stories we are told, right, the narratives as I like to describe them? The problem, of course, with academia, is that the puzzles you’re trying to solve, you’re locked in your little garret, and you’re publishing it, maybe, to a very small audience. And so, I always was interested in a much larger puzzle, which is the puzzle of markets, the game of markets.

So, I had the opportunity to leave academia, first with starting a software company. We did well with that — sold that. Then I got into the investment world, first from venture capital, some private equity, but finally into public markets, I say the biggest game of them all. And, trying to understand that puzzle, ran a hedge fund for seven or eight years. We got that up to about a billion dollars and never lost money for clients, and still very proud of that. Had a tremendous year in 2008. But from March of 2009 onwards, it was like you went to the switch on the wall and you flipped off the lights. Returns really flat-lined. They say we never lost money, but the investment world really changed. I can point to the date in March of 2009 when I’ll say, not just, the Federal Reserve, but central banks all over the world, took this very interventionist policy, I think probably smartly, rightly in March of 2009.

But what do you see both in our recent past, but also in every time when you have these emergency government actions, they always become permanent government policy. And, that’s certainly what we’ve endured over the last decade in markets. It’s what we endured in my hedge fund, where the fundamentals didn’t seem to matter anymore. And, they say, didn’t seem to matter — they really didn’t matter anymore. So, you know, we gave all the money back to our clients and I decided I’d really take some time off to try to figure this out. You know, what does matter today, in either of managing other people’s money or investing our own money? And, that’s why I started writing Epsilon Theory. I’ll get back to, and we tell what that means: Epsilon Theory. But, the whole idea of Epsilon Theory is that, it’s not alpha and beta — it’s not looking at the fundamentals of this or the, in terms of beta, the overall market of that. What is really driving both our political, but also our investment games today, I think, is that first research puzzle of mine, the use of narratives — the way that we, as a crowd of in this case investors, respond in systematic ways to what we are told, whether it’s called forward guidance from central banks, whether it’s Trump tweets, whether it’s Cramer on CNBC, you know? We’re immersed in this ocean of messages and stories and narratives to a degree that, you know, I don’t think has ever existed. And so, that’s the puzzle I’m trying to figure out.

That’s the puzzle that I write about. It’s to focus, not on the fundamentals, but actually on the narratives, because I really believe, more and more, that’s the answer for figuring out the game of markets. That’s what I do. That’s what I do, Albert.

AL: I think, and tell me whether or not you agree with this, Ben, but the reason that narratives have become so important, and I do agree with you on that point, is because the Federal Reserve and the federal government — you know, together controlling fiscal and monetary policy — wield so much power, and they are accountable in some sense to public opinion, and public opinion is swayed by narrative. So, you don’t have independent investors — you have one big investor in the Federal Reserve that can buy trillions and trillions of securities. And then, you have a taxing authority that can tax and spend on things. And they just make too big of a splash, so you have to respect that. Do you agree with that?

BH: Well, I do, Albert. But I would go even farther frankly, because it’s not just, what I’ll call, the mechanistic impact of, in the case, central banks buying securities — you know, adding to their balance sheet by buying financial assets. Yes, that has an impact right. It is the tide that lifts all boats. It is the avowed purpose of large-scale asset purchases. But, what I think is even more important today than the mechanistic impact of the actual purchasing of securities is, what I’ll call, what we would call in game theory, the common knowledge game — the role of words, of forward guidance, of what they call in the Federal Reserve: communication policy.

And, I say this not in some tinfoil hat conspiracy notion, but I often talk about how Ben Bernanke, in his last speech as Fed chair — it’s interesting what people say in their last speech right? You know, George Washington talks about the dangers of entangling alliances. In his farewell speech, Dwight Eisenhower talked about beware the military-industrial complex — I mean Dwight Eisenhower for God’s sake is warning about a military-industrial complex? Well, Ben Bernanke kind of had a similar moment in his very last speech as Fed chair. And, it’s a wonderful talk. He says, well you know I’ve been here for eight years. First four years, all right, seem to be steady she goes, right? Those last four years, because the last four-year term started and it’s been quite a doozy, right? And he said, well, the first thing we did in response to the great financial crisis, we used the toolkit that the central bankers have always had, right? We took interest rates, short-term interest rates, down to zero.

We didn’t know at the time we could have negative interest rates, we just took it down to zero. And, that’s what we thought we could do. It wasn’t working for us, so he came up with a second set of tools: the quantitative easing or the large-scale asset purchases. And, Bernanke says: look, I think QE1 was really successful.

Yeah, speaking myself, Ben Hunt, I agree. I think you won, actually saved the world. I think that’s what central banks are supposed to do, right? They are supposed to provide that emergency liquidity, that emergency shot of adrenaline when the heart of the global market economy stops beating. But, like I say, the problem is that emergency government action always becomes permanent government policy. And, that’s certainly what’s happened. Today, we now have a permanent IV-drip of adrenaline in the form of these large-scale asset purchases. And, the crazy thing is Bernanke agrees with this. In his last speech he says, you know, frankly QE2 I thought was kind of a wash, you know had some puts and takes. I don’t think it really did anything. I think he goes on to say QE3, what we did after that, you know the twist and QE-infinity whatever you want to call it, Ben Bernanke, the outgoing chair of the Federal Reserve, says I think these were counterproductive.

Imagine that, right? Yeah, he says, I don’t think it had a real-world impact. Certainly, it had the impact of inflating financial asset prices, but it wasn’t accomplishing what we thought we could in the real economy. But then he goes on to say that, well in his words, fortunately, my view not so fortunately, he says they had a third toolkit, and this third toolkit was what they call, [what] the Federal Reserve calls, communication policy. It’s expressed in this notion of forward guidance. And, it is, as Bernanke says, the intentional use of our words to try to change investor behavior — to use our words, not because we really believe the words but, because we think the words will have an impact, or an effect, in changing investor behavior — you know, what we might call lying in other circumstances. And, this is why we have a calendar, where we send out — every governor of the Fed goes out with its calendar of the interviews they’re going to give and the talks they’re going to make. It’s all coordinated. It’s all coordinated. This didn’t exist before, but it is absolutely an intentional, and very effective way, at changing investor behavior.

I’ll tell you it’s something that politicians have known forever. But now, everyone is in on the act. Everyone now uses their words and carefully constructs their messages, because they want to have an impact with their words alone. So, this [is] what you see from CEOs, whether it’s Marc Benioff or Mark Zuckerberg right? This [is] what you see from central bankers, whether it’s our own Fed leaders, whether it’s Mario Draghi or whoever is running a central bank. Everyone knows now this [is] how it works — that you can use your words. And, there’s a pattern for how the words are used. And, that’s what we’re trying to measure in the research company that I set up.

How are these words used? How do they have an impact on us?

Because, we’re hardwired to respond to this stuff, and that’s what I think has an impact, even more than what you correctly point out is, what I call, the mechanistic impact of buying stuff.

AL: That’s very interesting. I actually agree with you in the sense that they’ve just invented this new tool. It’s related to the tools that existed before that, just translated through time. The forward guidance and the expectations actually become the policy, and then the follow through, or lack of follow through on that, becomes a backward revision. So, I agree with that. And, the markets are behaving the way they would if you did that with your children — if you promised a trip to Disneyland [and] then later you said you weren’t going to do it. They would throw a tantrum.

BH: Children and markets are very effective, and they’re very effective at learning how to turn your words against you.

AL: That’s exactly right. I actually don’t come down hard on my kids when they try to do that to me, because that’s preparation for the real world — to manipulate situations like that. So, that’s very interesting, and the way you write, because I have sort of dipped my foot in Epsilon Theory, I can see why it’s so popular because it’s very well written, it’s very clever and, if you read carefully, it’s a tad bit rebellious, which we love. You talk a lot about, at least on the interview with Grant Williams, you talked a lot about your farm and the animals. I really enjoyed that. I have a friend who is in a similar situation as you — has a career in engineering but has a farm which doesn’t produce a lot, but is a legitimate, authentic working farm. He also has these analogies and I want to ask you if the links that you see — between the farm, ecosystems, animals, biology and markets — are you just seeing them because that’s what you’re immersed in?

I mean, you know, human beings are programmed to recognize faces, we’re just sort of evolved and hardwired to recognize faces, so we see faces in the clouds, in food, in the dirt, the beach and the ocean. Have you become soft-wired to see analogies and connections to farms in markets?

BH: Well it’s the word you used just a second ago Albert. Used that word “authentic.” What I love about my dilettante farm, our animals are pets. I mean I like animals that pay the rent, like the bees, like the chickens. But our sheep, we shear them and we use the wool, but they’re basically pets. This not a working farm. This, for me personally, is trying to get back to a world, of your word, authenticity, because there is a realness to the real world that is so distant. And, I think it’s such a healthy corrective to the world of artifice that we live in today — playing the game of markets. I think that distance, that gulf, between the world of artifice — the world of words and stories and narratives — and the real world of fundamentals has grown so dramatically over the last decade, again, intentionally so, in every aspect of markets.

So, for me, not just a respite, but the reconnecting with a world of cycles — the seasons, a world of Earth, a world of real life where, yes, you must eat, you must drink, [provide] fresh water for the animals. You can’t tell them a story, right? No, they’ll die.

It is that authenticity, of even a dilettante playing at being a farmer, that I find is just enormously, intrinsically rewarding.

So, you ask about the stories? My effort is to try to communicate to a broader audience these stories of the real, to bring into sharp contrast the stories of artifice — this world of artifice that I think we live in more and more in our market existence, our existence as investors. So yes, I intentionally look for, and identify, patterns in nature that I can then write at to draw contrast with our world and markets. I do that intentionally because I do find that these stories of the real of the farm and of animals are so powerful and evocative to people, like you and me who otherwise spend all their time in markets. I think we all know that something is wrong, right?

I’ll use this phrase or this great line from one of these spaghetti westerns of Clint Eastwood, Outlaw Josey Wales, where, pardon my language here, where his character says, “Don’t piss down my back and tell me it’s raining.”  I feel like we live in that world, that world of people telling us stories in our market existence. And, that’s why I find it so powerful to bring forward stories of the real — of animal behavior, of farm behavior — and it immediately throws our market world into such sharp contrast. It immediately gives a point of purchase for someone to read the article [and] say: What? This market world is not real. It is what I like to call fiat world, where opinions are presented as fact, where we’re told the way the world works in sharp contrast to what we see with our own eyes.

So, yes, Albert it’s all that. I do intentionally look for these connections precisely because I find them so powerful in bringing into sharp relief this world of artifice that we’re immersed in, and markets.

AL: Ben, I want to try out an analogy of my own on you, and then we’ll move on to some, maybe, practical discussions on the markets. When you’re going through your farm, you say you talk about how each of the animals sort of pull their weight in a sense — they produce. My friend who has the farm is very proud of that fact as well. Everyone has a role, and if you don’t, if you don’t have a role, then you better watch out because an axe may be coming. You talk about the chickens, the sheep and so on and so forth. They all pay their way. They produce eggs, wool. In a sense they’re producing earnings and dividends. And, when you talk about the suspension of reality that happens in the public markets, but it really happens in the private markets, when you talk about WeWork and Theranos and companies like that, these, to use the phrasing that you used on the farm, these are pet stocks. They’re not working stocks, they’re pets. And, your daughters may have had some role in classifying so many of those animals as pets. Why are we tolerant of that in investment markets? Why are we willing to put up with so many pet stocks?

BH: You know, it’s always the byproduct, Albert, of the hothouse environment that one lives in. At the end of a nine-year bull run, you are looking for stories, for entertainment, because your survival is not at stake. I mean, we’ve got a couple of goats on the farm all right. Goats do nothing. They are a pleasure. They’re a joy. Goats are fun. They are, they’re dancing around. I like to think of it like mobile art. They’re a luxury. They’re a luxury, right?

And so, I love my goats. I can’t imagine not having the goats, but they’re absolute luxury. And this, what always happens in markets at, again, the end of a long bull market is that we find our pleasure, we find our art, in these crazy stories like WeWork. It’s how humans are wired. Then again, you expect this. This is what I try to write about, and what’s really driven me, in all my, kind of, figuring out games and puzzles — whether it was in academia or software or markets. It’s how we, as a human animal — forget about the farm animals let’s talk about the human animal — how the human animal is hardwired, and, as you say, softwired, to respond to stories, whether it’s the story of the gamboling goat or whether it’s the story of WeWork.

These are the stories that, I think, if we continue to bring them to our own attention — you know we’re not immune to the any of this stuff, not all of us — we can be more resistant to that — by remembering these stories and remembering that what we think is only natural is, frankly, a creation by somebody who understands how we are wired as a human animal.

AL: Ben, I don’t know if it was the panel that we did together in 2018, but I distinctly remember asking for predictions as to when the bull market would end, and possibly end in a recession or a depression. And, before I received the responses, I joked that everyone always says two or three years away. And, sure enough, the answers were all two or three years away. I had the same folks on the same panel this year, and I was thinking, well I mean it’s got to be one or two now, right? I mean, it’s a year later. It’s the same guys. And I thought, one?

I count myself in that group as well. I’ve been concerned about this for a long time. I thought the hallmark would be something like WeWork getting shut out of public markets, and those valuations coming down. The closer you get to the end, the more ridiculous the story is that we’re being asked to buy into. That was truly a ridiculous story, and it was shot down.

Do you agree with me? I mean, is this sort of the first sign that this, at least this chapter of the story, is over?

BH: So George Soros, you know whatever you think of George Soros, he’s a great investor, right? And, he has this wonderful line. Somebody was asking him about, I don’t think this was about when he and [Stanley] Druckenmiller were making one of their fortunes on shorting the pound, I think another currency. But somebody asked him to talk about what he was doing. And so, he started explaining what was going on and how he’s positioned. And, somebody (the reporter) said, “Why are you predicting that? Why do you think that’s going to happen?”

I’d duplicate the accent if I could, but I can’t do my old Hungarian accent very well. Soros said, “Young man, you know I’m not predicting — I’m observing.”

I’m not predicting I’m observing. And, that’s really stuck with me a lot. And, the way it’s stuck with me is that, I think, when you think of things in terms of a game, and here I’m using game theory in that rigorous sense, it does not lend itself to a prediction.

That’s why I always hate this kind of exercise we feel like we’re forced to go through: to predict something. What I can do, though, because I am focused on observing changes, and directions, the narrative, you know — I might want to try to pretend to predict when does this break, but what I can, I think, tell you is what we have to observe before it can break, before the story breaks.

What I mean by the story breaking is basically an Emperor’s New Clothes moment, which you’re right we kind of did with WeWork, right? It was like: Wait, community adjusted EBITDA?

What? Wait, you paid the guy ninety million dollars to get the name “We”? It was an Emperor’s New Clothes moment.

That is absolutely a hallmark of the story breaking. But, that WeWork story broke, but that was the company looking to go public. You didn’t have public investors, and WeWork, who suffered the brunt. The brunt, was shouldered mostly by Masayoshi Son. You see, Son and SoftBank, you know I’m not going to cry for them and they’re not, I think, suffering from this, right? The lessons of that, I don’t think, are really realized in the form of SoftBank. They’re going to keep on doing this, you know, forever.

What we have to see is those sorts of Emperor’s New Clothes moments, not on a single company that’s looking to go public like WeWork, we have to see that same sort of breaking of a story around one of our big institutions, like the Fed, like the ECB, like we saw in 2008 when the story broke about Wall Street banks. By the story breaking, I don’t mean about being revealed. I mean about the confidence, the narrative that these guys were large and in charge, that story broke. It fell to pieces.

We’ve got to see the same thing happen. It’s kind of [an] Emperor’s New Clothes moment, with a little girl and the crowd says: Hey wait, WeWork, that doesn’t make any sense. But instead, it has to be that statement: Hey wait, Jerome [Powell], that doesn’t make any sense what you’re talking about, what the Fed is doing.

That’s when it changes, right? I can’t predict when that’s going to change, but that’s what, when you observe that, that is when it will change.

AL: That would be a serious development, though, right? Ben, you started this discussion by saying that you supported the Fed’s intervention with QE1. If the story would change and it were to be revealed that the Fed had no clothes, that they’re no longer sufficient [as the] lender of last resort. That can’t be something that you would want to see, is it?

BH: Look, I very much believe that what the Fed did in March of 2009 was exactly what you want a central bank to do, because we really were on the verge of the entire system breaking down. What I think has developed in the decade since then is not a risk of the system breaking down again. Instead, I think it’s the risk of the system overtaking — you know, use Star Trek, becoming the Borg and enveloping everything — so that there is no more market, so that capital markets have been transformed into a political utility. That’s as much of a tragedy as the markets collapsing.

I’d like to think there is something in between those two extremes. I’d like to think that we can have a functioning, break glass in case of emergency, central bank that, when that emergency occurs, as it did when Lehman was taken out in the street and shot, when the entire global financial system is on the verge of being ruined, you break that glass in case of emergency and you take those emergency actions. But I don’t think that our choice has to be defined in either, well you’ve either got that or you’ve got this Borg-like central bank and Wall Street edifice that eliminates price discovery, eliminates the role of fundamentals and, again, transforms markets into this political utility. I think we can find something in the middle. And that’s what I’m hoping for and, what I’m suggesting is happening, when you have that Emperor’s New Clothes moment with what central banks are doing today. And, I think I know what that story might be.

AL: I could argue that the banks were turned into utilities the minute Paulson said to Bank of America, you got to buy these guys, and Bernanke said to these other guys, you can’t pay dividends unless we stress test you. I mean that essentially took the market forces out of banking. And, if we’re to go back [to a market system] you would have to concede that some of them would fail and other ones prosper and pay dividends and have rising stock prices. Correct?

BH: I’m with you a thousand percent. What I’m saying, though, is this has been a process, right? It’s a process that, look, I get it, if the choice is between Wall Street doesn’t exist anymore and we’re going to have this intervention, okay, I can get that trade off. What I can’t get, again, is transforming emergency action into permanent government policy. And, that’s what we’ve had.

So, I’m hopeful enough to think that we can at least not exist at either extreme, because I do think that we have absolutely evolved into this extreme, where again Borg like you know, there is no more price discovery.

There is no more role for fundamentals. It’s all story. It’s all story. And, I think that can be diminished, undermined. I hope, I think, I want to believe, right, without going back to collapse of asset prices and the end of the system as we know it. I think the longer we go on like this, the longer we go on without an Emperor’s New Clothes moment, then the more painful the fall from these heights will be.

Okay, none of this is going to happen organically, or on its own right. We saw that in December of 2018, or Q4 of 2018, where, oh my god, where we’re raising interest rates to, checks notes, 2.5 percent. Oh my god, the world can’t handle that. And so, we saw Powell and the rest totally turn on a dime and cave in to what are political pressures. And, you know, we saw what happened this past year, in 2019.

So, it’s not going to come from inside. It’s going to have to come from the outside. And, the way it’s going to happen is in a breaking of the story. And, I think what breaks that story, I really do, I think it’s inflation, because I think it’s coming. I think it’s coming because of another thing you mentioned, Albert — which is not just what central banks are doing, in terms of their asset prices and what was happening in terms of the government in terms of its control over fiscal policy — I think that inflation is coming into the real economy, not just in the financial world as we’ve seen with central banks buying, and I think inflation is coming.

Frankly, I think is already here, and I think that’s what breaks the story of central bank control.

AL: I want to shift the discussion now to an article you wrote about Facebook and Bitcoin. You titled it, The Spanish Prisoner. I thought that was very interesting and I’m actually again, I’m on the same page with you on that. I’ll take it one step further, but basically, you’re saying that Libra was designed to co-opt Bitcoin. Libra is the cryptocurrency currently being promoted by Facebook.

Can you just go over the thinking behind that?

BH: Sure, absolutely. I’m a fan of the, I’ll call it, the positive energy that comes from Bitcoin true believers and the crypto-community more generally. I share so much of the sentiment, so much of the animus that directs that community, which is to say, look [at] our current monetary policy, it’s being used against us, not for us. So, I understand the interest in finding and developing this alternative to fiat currencies, and in the form of Bitcoin, or crypto, or the like.

I think there are real issues with that because I don’t think the government, any government, will ever willingly give up its ability to control money. I think that’s why governments exist — to control money, taxes that come from that, the seigniorage that comes from the printing of money, the control of taxation. So, it’s the political risk around cryptocurrencies and Bitcoin that leads me not to be a big participant. But I get it and I share, again, the energy and the sentiment that underlies so much of crypto and Bitcoin.

What I think Bitcoin, the real power of it, and much of crypto, is, if [it’s] not censorship proof, it is censorship resistant. That’s a phrase you hear a lot of times when you talk about Bitcoin or cryptocurrencies. What that means is that, because it has this underlying distributed ledger technology, Bitcoin being one of those powerful and elegant distributed ledger technologies, the record, the history of that Bitcoin, or that coin that is censorship resistant, [is] you can’t, easily at least, a government can’t, come in and control it.

It’s censorship resistant, if not censorship proof.

What I thought we would see — I think Libra is just the first of these attempts to co-opt censorship resistant coins like Bitcoin. I think Libra is intentionally set up to be a censorship-embracing coin. The idea behind Libra is not that it is somehow in opposition to a government or separate from a governmental sphere of control and censorship. No, Libra embraces the idea that it is compliant with the government.

So look, maybe it won’t be Libra. Facebook’s got its own public relations issues, but beyond Libra there will be others, other coins, other cryptocurrencies, that are promoted specifically by corporations, not in a resistant way to the government, but in a [collaborative], cooperative way. That’s what I mean about how, in my view, Libra and these censorship-embracing coins are trying to co-opt the idea of Bitcoin in crypto, but do[ing it] in a way that’s non-threatening to government.

Hence my point of view — [it] loses all of its appeal.

AL: Exactly. It seems to strip Bitcoin of its most desirable features and saddles us with some of the worst features of the cryptocurrency.

BH: Absolutely. It becomes, it becomes an electronic fiat currency, which is where governments want to go. They don’t want cash money. They don’t want paper money floating around to be in existence. The whole effort is to continue to exercise control. I’ll call it soft control using their words or, if we can’t have that, well let’s have currency being represented just as digital zeros and ones.

It’s all part and parcel, I think, but the same impetus. And again, I get it, right? But, [that] doesn’t mean that I have to go along with it.

I find by talking about it, relating it in stories that connect with people and their real-world experiences, I find that’s the most effective way for me at least to try to ring the bell and bring people’s attention.

AL: I appreciate your conclusion — that is, that real, authentic, Bitcoin sort of becomes analogous to gold. It becomes gold, basically, which is what people said it was going to do, at least [what] proponents said it was going to do. But gold hasn’t solved our problems. As much as I like gold, and advocate gold, and hold gold, it hasn’t solved the world’s monetary problems because it’s just not in high enough circulation.

And, your conclusion is that Bitcoin is going to become one of these commodity currencies over time. Is that true?

BH: Yes, and frankly I like Bitcoin as a trade, in the same way that I like gold as a trade. I have, I’ll say, real concerns with making it a core investment because of the political risk that I associate with Bitcoin. But, Igiven my view that I think inflation in the real economy is coming, frankly, I think it’s already here. Right?

But I think that the narrative around inflation is going to grow. I think that’s extremely threatening to the prevailing central bank narrative: that we’ve got your back, market. We got this under control.

I think that once the genie of inflation is out of the bottle in the real economy, it’s very difficult to put back under control. You really think the Fed is going to raise interest rates from here, when in Q4 of 2018 they tried to raise interest rates 2.5% and they were basically taken out in the street and shot? The Fed says, oh we have all these tools to control inflation.

Give me a break.

They do not. They do not. Politically, they cannot.

So, as a trade, I like gold a lot here. I like, God help me, I like Bitcoin a lot here, but it is — particularly when it comes to the political risk associated — a place where governments have enormous control, just enormous control.

So, that political risk keeps me from having it as, I’ll call it, a core, lifetime holding. But, it’s absolutely something that I think is very attractive right here as a trade.

AL: I understand almost everything you said there. I definitely understand Bitcoin as a trade. I understand gold as a trade in some circumstances. But, why not gold as a store of wealth?

That’s sort of its traditional use.

BH: Yeah, and I think gold can have use as a store of wealth.

I think, I want to talk for me personally again, my store of wealth is in the land, in the farm. I find it, for me personally, that’s where I want to try to store my wealth. I have a very broad conception of what real assets mean. Real assets can include intellectual property. I prefer real assets to have some sort of cash flows associated with them. I like that, but I’m not opposed, or I don’t disagree, with any of these conceptions of real assets.

What I am opposed to, to the degree that I cannot be immersed in it, is that world of artifice, that world of narratives and story. So, what I’m increasing, what I want in my investments, I’m just speaking for me, is I want to be closer to the real. In public markets, what does that mean? It means getting closer to real companies that still offer real fractional ownership share in real cash flows — harder to find in public markets today.

That’s the same thing I want in private markets. That’s the same thing I want in my own life.

So, I look for that notion of storing value and real assets. For me, it’s tied up more with land. It’s tied up more with knowledge — intellectual property.

But I get it. I’m not opposed to [gold]. It’s just, for me, that’s how I like to express.

AL: I’ve got two follow-up questions. Unfortunately, we have to get going because you’re running out of time. One of your conclusions was that Bitcoin was going to become more like gold. And, one of the things that involves is, sort of, the stigma associated with gold, or the stigma we attach [to] the type of person that would invest in gold. That’s the type of person that’s going to invest in Bitcoin.

Is the stigma part of the reason that you don’t see gold the same way as you see other assets or is there some political risk associated with gold that you don’t see associated with other assets?

Why do you put gold in a different category?

BH: Well I think gold has this, you call it, stigma. I would describe it as the intentional narrative that is created by government to stigmatize gold. And you saw the same thing around Bitcoin.

When Bitcoin started to grow in popularity — oh Bitcoin, that’s used by terrorists; you must be for the terrorists if you’re engaged with Bitcoin. We all saw this stuff.

And so, what I’m trying to do is, again trying to, observe rather than try to predict. What I’m observing is the government has a powerful vested interest in trying to control the adoption of gold as an alternative store of value, as an alternative currency, as a cryptocurrency. And, they certainly have an incentive to try to control digital cryptocurrency, like a bitcoin. I think of it as a trade in that, look their efforts to control that are limited, right?

I think that, having seen with our own eyes its value in an inflationary environment, yeah, I think I’d like to own some right now, again as a trade, but for me to devote my wealth, my family’s wealth, my children’s well-being to something that I think is always going to be under this sort of assault — I’d rather find other ways I think are less risky of the government, through soft methods or hard methods, coming after me or that store of wealth. That’s where I come out on this.

AL: This all makes sense. I would expect to hear a former professor with a family, at a certain point in life, talking very conservatively like this. But you also ran a hedge fund, so there is a speculator in you. I want to close the interview just by asking you about some of the ideas you have for the next year on where people might look for returns. You talk about safer, cash-flowing types of assets. You know Netflix was the stock of the decade in the public markets. And, we know what it does with cash — it just burns it. But the return was phenomenal.

So, if not those types of companies, where would you look for out-sized returns in 2020?

BH: So look, I’ve been levered long personally because when the rules change it’s going to be a political utility. That’s what you want to be, so we’ve had this past ten years. For me, personally, it’s levered long and to go with this flow.

So, what I’m talking about in terms of narratives and the story breaking, it’s not because I want to fight the Fed, it’s because I don’t. I want to be able to observe and react to how the world is changing. I think we’re on the cusp of a change from a 40-year deflationary cycle into the beginning of an inflationary cycle and everyone’s investment playbook from the 1970s needs to be dusted off.

Most people don’t have that playbook. I wasn’t a professional investor in the 1970s, but I can read and I could try to understand what works.

That’s what I think. That’s the playbook I think we need to dust [it] off.

I will say this: When you’re talking about an inflationary environment, the worst place to be is in fixed income. We got to get that right. What you’re looking for are companies that have pricing power. It’s like they say, in fast food what are the three most important things? Location. In an inflationary environment, the three most important things are pricing power, pricing power, pricing power.

I think that fundamentals will matter again in an inflationary environment because I don’t think that the Federal Reserve has the tools really to combat that genie once that gets out of the bottle. And so, in the way that fundamentals matter again for looking at individual companies, you need to look at pricing power. Your multiples are going to suffer as interest rates go up. That’s just a mechanistic issue — that high multiples mean that you’re pulling forward growth from the future and into today.

So, I think that high-flying profitless, cash burning unicorns are under a lot of threat and a lot of pressure in an inflationary environment. I think that the companies that [possess pricing power], whether they’re commodity focused, or their story has some sort of percent perceived pricing power alongside it, I think that’s where you want to be. I say I’m not predicting but I am observing.

I think that’s going to be the story of 2020. This inflation in the real world — which we’ve been told ad nauseam over the last decade, “oh there is no inflation, there’s no inflation.” That isn’t true. There absolutely is. And, once we get the spending, that’s going to come out of whoever is elected in 2020, well that’s when I think that inflation genie gets out of the bottle of the real economy. And, that’s what I think changes everything in terms of the story for the game of markets.

AL: You didn’t say this, Ben, but it sounds like a good argument for gold, silver, commodity currencies and non-US dollar denominated assets.

BH: It is actually, absolutely with the exception of the non-USD currencies, because what we’re talking about here, this not just a US phenomenon — it’s a global phenomenon.

I think, in terms of currencies, the US is always going to be that best house in a bad neighborhood. So, I don’t have a prediction on where the dollar goes, up or down, because I think that’s the hardest thing to predict.

What I can predict is that, in a global inflationary environment, everything you mentioned in terms of that traditional playbook, I think it’s going to be a playbook worth holding on to in 2020 and beyond.

AL: So, you are at EpsilonTheory.com and on Twitter @EpsilonTheory

BH: The website, Twitter is free to read. We publish a lot and I appreciate you introducing me to your audience.

AL: Thank you very much, Ben. Definitely go to his website and check out that Real Vision interview. It was very enjoyable. Ben, I’ve kept you on long, so thank you very much for joining us and I hope we can do it again sometime soon.

BH: Be my pleasure. Thanks again.