117: A Century of US Monetary & Fiscal Policy, Debt as a Percentage of GDP, Cycles of Inflation, Lyn Alden

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It is my pleasure to bring to you today a guest who is long overdue. We should have had her on a long time ago because her work is absolutely brilliant, highly technical and that is none other than Lynn Alden. Lynn, welcome. How are you? Good.

Thanks for having me. Happy to be here.

It's good to have you on. You know, you write and talk extensively about investment strategy and all areas of the economy and markets and just have a really good macro view on things. And I just wanted to maybe ask you to start, you know, where do you think we've Ben, maybe just very recently and where are we now? Where are we going? That's what everybody wants to know. It's of course the trillion dollar question, where are things going? Yeah, take it wherever you want with that.

Yes. My overall view of the past few years has been that we're shifting towards structural inflation and it's a very different type of inflation than the 70s. It's more like the 1940s in the sense that in the 70s a lot of that inflation was two main things. One, you had demographics reaching their peak and so, so many people were taking out loans. There's a lot more loan growth and therefore that was where the new supply of money was coming from. And of course you also had specific oil shocks, things like that. So you had tons of demand, a change in supply this time. What you have instead is fiscal driven inflation. So instead of excessive bank lending, it's the large fiscal deficits that are then monetized and just puts more money into the system. That then translates into higher prices as it with a lag it diffuses through the system. And that was very similar to the 1940s environment. Another similarity is that the debt is super high and so you have a slow response with interest rates. I mean now, you know, last year they, they moved interest rates up very quickly, but that was on a considerable lag compared to you know, what was happening with inflation. So now they're kind of playing catch up. But it's because there's so much debt in the system that unlike the 70s, where they could just, you know, they could jack and trades up to 20% and, you know, the system would implode, whereas here they're obviously much more constrained. And so the combination of high inflation and high debt is something we've not really seen in the developed world since the 40s. So that's kind of the era that I look at for, at least for guidance, for information, for comparisons, even though it's obviously not a perfect comparison, it's just very useful. But within that broader scope that we're in, I view, you know, this, this current period, ever since mid-2022, that we're now more in a disinflationary cycle within that broader inflationary cycle. And if you look back, actually the past inflationary decade, the 70s, the 40s, you generally didn't get inflation in a straight line. You get waves of inflation. And then there's periods where they try to fight back. They try to tighten money supply, they try to tighten fiscal. They try to. Sometimes they do price and wage controls. They try various things to fight back, and that. It's like holding a volleyball underwater. It works for a period of time, but then it just, you let it go and you go on to the next. Next wave of it. And so I think we're currently in a. In a disinflationary cycle within a broader inflationary problem. That's kind of the framework that I'm looking at a lot of markets through.

Makes sense. So I sense that you were very critical of the Fed. I certainly am. I think they waited way too long to tighten, and now they're making it too painful. Powell, all of the countless times he said the word transitory, which, you know, there was a little bit of truth in that. Obviously supply chains were constrained, but, you know, it's. At some point you have to just wake up and realize that if you flood the system with this many currency units, you're gonna get some inflation and it's gonna be pretty bad. Lyn, tell us more about the 40s, if you would give us sort of a Reader's Digest version of the 40s, the executive summary. I've studied the 70s extensively, you know, obviously more recent, so I know about it a lot more. But what happened in the 40s? I mean, you know, we had tremendous technological advances. We had World War II ending. We had the soldiers come home, the baby Boom generation, start a lot of home construction. Tell us more about the 40s.

Sure. What I'll do is I'll actually, I'll show a picture. These two charts I viewed as. As my kind of most important set of charts over the past couple of years. I made this actually a couple years ago, and it continues to be highly relevant. And so the chart on the top, it shows debt as a percentage of GDP over the past century. And specifically it breaks it into federal debt and non federal debt. And the reason that's important is because you get very different situations from the private sector being over indebted and the government being over indebted because the government can do actions that the private sector can't take. And so what the chart shows is that in the 1920s and the 2000s, you had these private debt bubbles. You had very, very high levels of private debt relative to the economy. And of course those collapsed. The first One was in 1929, and the second one was in 2008. And so those have caused the two biggest banking crises of the century. Those caused massive disinflationary contraction. And they really realigned a lot of social things, political things, all sorts of things like that. And then also what the chart shows, that federal debt in both instances began to peak about a decade later. So during the 1930s you had increased federal spending, but even then you didn't get an enormous amount. You just got a big uptick compared to what they were doing before. But you also got a rising populist sentiment around the world that eventually contributed to World War II. And that's when you got absolutely massive government spending, obviously to fight the war. But when you fight the war, a lot of that spending is actually domestic. You're building factories, you're hiring people, you're buying commodities, you're supporting everything. And so basically, in some ways, it served this big giant inflationary fiscal stimulus. So you radically increase the money supply. And in large part you inflated the debt away. And so basically there's this huge spike in federal debt as a percentage of gdp. But then you have this long structural period of financial repression. Mostly rates were below the inflation rates, and so they were able to increase nominal GDP at a faster rate than the debt increase, and so you decrease that. And so what I show essentially is that we're kind of going through an echo of that period where the 2000 and tens were in many ways a lot like the 1930s, basically the aftermath of a big private real estate stock and banking bubble. Whereas the 2000s, in many ways are more resembling 1940s in the sense that there's huge government debt, huge government deficits, and this tends to be more inflationary. What the chart at the bottom shows, it shows interest rates. So short term interest rates, we can see they, they hit zero for the first time in the early 1930s, and then they hit zero a second time in 2008. And so again, that's like another echo basically of the banking crisis that we experienced before. The gray bars in that chart show federal debt as a percentage of gdp. And so you basically showed how large the fiscal expenditure was in the 1940s and then again in the 2000 and twenties. And so essentially what this chart shows is that it's in many ways a whole echo compared to what we experienced roughly 80, 90 years ago. And that's why that period is worth studying. That whole 1930s and 1940s period is very much worth studying because we're going through a lot of the same things today.

I am shocked at the gray bar levels in the 40s. That is truly shocking. I mean, that is more than double what it is today. And we all think we're in such bad shape today. But I love the way Bill Bonner, one of the founders of Agora Financial, who's been on the show before, I love the way he puts it. He says the Great Depression ended due to the largest public works project in world history, and that was World War II. So, you know, what is that from? That's all war spending pretty much, right?

Yes, war spending. But in that, in that case, I'm.

Wondering if it's New Deal spending or war spending, like, you know, where did that come from?

Yeah, so if you look at that bottom chart, these smaller gray bars in 1930s, that was mostly New Deal spending. So even that you can see it was a big uptick compared to the 1920s. I mean, the 1920s, you were generally running surpluses more often than not. And so the expansion in domestic programs mainly was the 1930s. And so again, it was big. I mean, at the time, they would have considered those numbers big in a similar way that we would have. We thought the 2008, nine stimulus numbers were big, passing seven, you know, $700 billion, you know, packages that now seem quaint.

Yeah, that was nothing compared to the COVID bailout.

Exactly. So it's kind of a similar thing where you pass something that seemed large at the time. And it's like, well, you ain't seen nothing yet. And it's the, you know, it's the 2020s and 1940s, they greatly eclipsed those. And that was largely military spend. But then it also was like, let's say, for example, in the 40s when those soldiers came home. One thing they learned after World War I is that, you know, when, when soldiers came home, they kind of gave a bus ticket and said, thanks for serving your country. And, you know, you go to where you want to go. And so you started to get, you know, a lot of disgruntled people and you started to get sympathies of communism throughout. It became a big issue because that's when you had the rise in Soviets and you had people debating what, what economic model can be best. And so one thing they try to do after World War II is, is give the soldiers more support. And so they did the GI Bill, for example, they said, okay, we're going to send 8 million people to college, technical school, whatever is appropriate, whatever they want to pursue. We're going to, you know, finance their mortgages, basically subsidize their mortgages. We're going to do all sorts of things. And so that was, that was like another round of almost New Deal type thing, because that was domestic funding. Yeah. And so you did have that kind of combined war and social spending that all occurred around that time. And a lot of it was focused on the working and middle classes. Right. So it was basically siphoning money away from bondholders who were technically getting paid back. Every penny that they owed, they were owed, but they were getting paid a much lower interest rate than the prevailing inflation rate. So they were getting essentially capital sucked away, and it was going towards these massive public works, going to war, going to GI Bills, things like that. Yeah.

At least, though, back then the, these programs were an investment. I mean, you could definitely argue that was an investment. I mean, building the country, building the dams, the highways, building the intellect and the skill level of the people, those were investments. But today we just give people money to do nothing. You made me think, like, why wasn't it during the COVID era? They make the COVID bill and it's like, okay, you're sitting at home, we'll give you money to learn a new skill.

Right.

And a lot of people did do that, thankfully, and a lot of new businesses started out of the COVID era, which is great, and maybe contributed to the great resignation as well. But that's sort of another discussion. But the welfare of today just seems to be this debilitating. Pay people to basically become losers. Welfare versus Back then, it's spending. Sure. You know, there's both sides of the aisle on that. But at least it seemed like it was a good investment and today it's just not that way, unfortunately.

Yeah, a lot of the spending back then, even though it was controversial, as you point out, went to long term things. I mean, the funny thing is if you, if you point out what is the individual biggest public works thing in history, the technical answer is the Internet interstate highway system in the United States, built in the 50s under Eisenhower. And that was an example where he used his military background, his military kind of observations and said this would, this would, you know, it's a one time expenditure but then it greatly increases the productivity of all companies in the nation. Whereas now when you have the types of stimulus we did, they're not nearly as effective and they're a lot more filled with pork. Even the things, you know, a lot of things, a lot of people focus on the stimulus checks and things like that, but a lot of people overlook the, the PPP loan that turn into grants. Right. I mean obviously on paper they were meant to help things like, you know, restaurants and things like that forced to be closed. But a lot of cases what happened was like you'd have law firms, you'd have investment firms, you'd have all these companies that have nothing, they were not facing any problem at all and they would apply for it and get it. And so you basically would just drop a half million dollars or a million dollars onto the bottom line of, of you know, wealthy lawyers and, and you know, investment professionals that were running these firms. And a lot of that just, that's just money that just permanently is out there in the economy now that's now circulating around and chasing, you know, that didn't lead to more products and services, it just led to more buying power from people who took advantage of those programs.

Right? Yeah, it's unfortunate, but that's the, the government is very bad at this kind of stuff. So that's, that's what we're dealing with. Okay, so where were we going with this? Of course we want to bring this around. What should listeners and viewers do? Where are we going? What strategies should they use to protect themselves or hopefully offensive strategies to thrive in this environment?

So I think the overall baseline to view this through as a lens of inflation or disinflation. Right. And so in the aftermath of a private debt bubble like we saw in the 1930s and the 2000, the 2000s, that tends to be a very disinflationary period. Whereas when you have very high public Debts and you have very large deficits as a percentage of the gdp, that tends to be more structurally inflationary environment. And it doesn't mean it's a straight line like we talked about before. There are periods where they fight back, but it's generally the background bias is towards inflation because it's just different ways to get more and more money into the system. And that, that is just structurally inflationary. And so right now, as they're trying to quell demand, as they're trying to tighten, as they're trying to just slow down economic activity, that can take the edge off inflation for a period of time. But as long as we have underdevelopment in energy, underdevelopment in copper, under development, in infrastructure, things like that, as long as some of the globalization pressures are you know, not, not reversing entirely, but they're just, you know, the low hanging fruit of globalization in many ways has already been picked. And so we have just more inflationary pressures in general. And I think that after this, this, you know, very, very tight contraction that they're attempting, when you look out to 2024 or 2025, I think it's likely we're going to have another round of inflation. And so I've been viewing a lot of the places to be long term are places like the energy sector infrastructure. So for example, pipelines that transport energy, they were very poor investments from 2014 to 2020, whereas I've been very bullish on them, inclusive of the dividends that they pay over time since 2020.

But that really depends on the political environment. Obviously. I mean that's the first thing Biden did is cancel Keystone. Right. So if we're in a green New Deal cycle, then those pipelines aren't, aren't going to be so good. Right. Or are they good because of limited supply? Right. You know, you know, that kind of works both directions. How do you mean that?

So that's a good point. And basically what we're seeing is a very different setup in the pipeline. So historically the reason the NLP structure exists since the 80s I believe is to encourage the build out of all that infrastructure. Basically they get all these tax advantages to do that. And so they, what you mean there.

Is the master limited partnership, which is a legal structuring and tax structuring vehicle that energy exploration and production companies use. The master limited partnership. Right. Do you want to.

Yeah, mainly the infrastructure ones, all the pipelines, all the ones that transport all that energy refined products, petrochemicals, things like that. So it's very much the midstream sector. And what that encourages is that they're constantly issuing new equity and that's how they're funding a lot of their operations. And that worked for a very long time, up until around 2014 when you started to get that fallout in energy. Basically Kinder Morgan, a bunch of companies like that had to cut their distributions. It was kind of a bloodbath in the industry because they were constantly relying on issuing equity and debt to finance their existing operations, essentially a Ponzi scheme. And so when valuations got tighter, when there was less capital available, the industry was forced to become more self financing. And some of the smarter ones, like Magellan Midstream or Enterprise Products Partners, they saw that coming ahead of time. And so they were already shifting in that direction, which essentially instead of constantly issuing new equity, they started to lower their payout ratios, become more self financing and operate more like a normal business. And so you've seen a number of them convert actually to normal C Corps. And even ones that have not converted, a lot of them are no longer issuing any new equity. Some of them are even buying back their equity, which is historically very unusual for MLPs. And so in part because it's very hard to build a new pipeline, the whole space has low valuations. And then they're saying, okay, we're going to pay out a 7% dividend, we're going to increase our prices in line with inflation, we're going to do small capex around the margins and we're going to buy back shares. And so you're basically, you know, you're buying things at 10 times cash flow compared to an environment where you have many equities that are overvalued, many equities that are facing margin squeezing pressures from partial globalization. And you have these other kind of cash flow businesses that if anything are locked in to their existing structures.

Are you in favor of the buybacks.

For that industry around the margin? Short I don't like some buybacks that are done because they, you know, they tend to buy back at the wrong time. Right? They, they buy back their stock when it's expensive. They, you know, they, they buy back less stock when it's, when it's cheap. But generally if a company is paying most of its excess profits out as dividends on a regular basis and they want to buffer, like, you know, sometimes they want to get extra capital back, they can either do a special dividend or they can buy back shares around the margins. And it's generally a little bit More tax effective, efficient to do the buybacks. So I don't like that.

That's limited to this sector. Like I'm guessing you wouldn't be in favor of like the, the buybacks that Apple and you know, all the, all the S and P type companies do or are you.

So generally companies that should be reinvesting and staying ahead of their competition generally want them. I prefer them doing dividends or you know, focusing on growth, focusing on just, you know, maintaining their edge in more, more kind of steady state industries. Railroads, insurance, banking, pipelines, things like that. Again, I think most of it should be dividends and that buybacks essentially serve as kind of a flexible thing that they can do to take advantage of certain situations or to return excess capital to shareholders because it eventually shows up in more dividend growth because they can spread their dividend payments over a smaller number of shares. But I don't, I don't like it when they're abused because when they're abused, it's just a way to prop up the share price.

Yeah, right.

It really comes down to why management is doing it versus, you know, whether or not the whole concept is bad enough. Because if you think of it as a, as a structural issue and if you had a company run by 10 people and one of them wants out and they use cash flow to buy out that owner, so now the company's broken into nine shares instead of 10, they each get, you know, 11% of the, of the cash flows. That makes sense. There's nothing really wrong with its structure on a large level. It's just that what's wrong is the short term planning that corporations do. Instead of investing long term for the future, they're thinking how to optimize a couple quarters ahead. And a lot of times the answer is buybacks.

Yeah. Which is the sad nature of life today and politics and Wall street and all the rest. For sure. There's probably more to say about where we're going and stuff like that. But before you go, I definitely want to touch on the back banking sector and maybe a little bit on housing too. I know it's not your specialty, but there's a lot of talks that banks are really in trouble. You know, is it, is it safe to have our money in the bank or. Any thoughts?

Well, I'm, I'm probably less concerned about the banks than the average bearers, let's put it like that. So one is, I'd be cautious about having more money than the FDIC insured amount in any specific bank account. You know, for any length of time. So you should, you should diversify into that. You can, you can go into Treasuries, you can go into multiple different accounts, things like that. So people should be cautious.

Which by the way, what Lynn's saying is, you know, that's one reason to set up entities. Okay, folks, you know, so if you have, you know, LLCs, corporations, trusts that are not, I don't think that applies to a living trust. Cause that vesting is probably the same, but it's gotta be separate vest investing. Then you have $250,000 of FDI insurance on every entity. Right? And so that is another form of asset protection is to just cover yourself in the fdic. Now, of course, if those claims happen and there's a big collapse, the FDIC certainly can't afford to pay the claims. But I'll bet you dollars to donuts, the government would step in and just do the bailout, which would be inflationary like it always is. But that's another pretty much.

Yeah, yeah. And, and as far as the bank taker as a whole right now, so it's interesting, going back to the period in the run up to 2008, banks had their lowest percentage of assets in cash and Treasuries than they ever had. And they had most of their assets in loans, riskier securities, things like that. So they were very aggressively positioned. Basically. You'd have to go back to 19, 20 twenties, defined a similar environment. And so that's kind of another echo from that, that, you know, period I talked about before. Whereas ever since the global financial crisis, when he saw basically partly his regulations, but mostly it's banks just not, you know, they're managing themselves different. They're not, they're being far more careful with their lending standards. And so they basically have been more conservatively positioned into cash, into Treasuries, you know, higher thresholds for what kind of loans they do, what kind of securities they buy. And so, for example, right now banks have a historically very high allocation, the percentage of their assets that are in things that nominally can't lose value like Treasuries and cash. And they have a smaller allocation than they normally had to loans and other things that can lose purchasing power. Now they are facing cyclical recessionary pressures. So they're, they're allocating more money towards loan losses. They're expecting a high, an uptick in loan losses which will eat into their profits. So I do think that, that in a cyclical sense they are facing, I think, recessionary pressures like any other Industry. The difference is that in 2008 the problem emerged from the banking sector largely. Whereas I don't view this recession as being very bank focused. Basically they're not like over their skis in a similar way that they were in the run up to 2008.

I agree with you completely. Definitely in the mortgage market, you're right, because I've certainly witnessed firsthand how tight the underwriting standards have been coming out of the Great Recession. But I read and hear things that that is not the case with consumer credit and auto financing. I hear that that market is over the skis, as you say.

Yeah, that's true. But if you look at overall kind of numbers, the bank sector as a whole is very mortgage focused, it's very commercial lending focused and things like auto loans are kind of like icing on the top of the cake. It's like a small layer. And of course there are certain banks that are heavily exposed to those. Those are generally trading very cheaply right now because there's obviously, you know, there's kind of blood in the streets there or the kind of, the potential for that to happen. So I do think there, there are obviously pockets of problems. Auto loans, you know, consumer loans, things like that. Whereas when you look at the, the average kind of large, medium sized bank, those types of loans represent a very small percentage of their book, whereas larger percentage of their book is elsewhere. So yeah, there's certainly pockets of more severe stress.

Yeah.

Right.

Any comments on housing?

So obviously you follow that a lot closer than I do. Essentially what we're seeing is a contraction in both supply and demand where existing home supply, nobody wants to sell. Also nobody wants to buy at these higher rates. So you know, we've seen a huge uptick in mortgage rates. We've seen very little change in effective mortgage rates because almost no, none of these, you know, higher mortgages are moving. Right. That's not really a place where people are buying and selling. They're kind of just locking in what they have now. And so I think we're seeing obviously more problems in the new home market. I think that's where we're going to see changes around the margin. Whereas the, the overall situation is that a lot of cyclical markets are probably going to, you know, they've already been running into problems. I think they're continue to be kind of deflating. Linear markets, I think are more kind of steady state. They're kind of locked into their current situation. And most of the pressure here takes the form just lower buying and selling rather than necessarily lower prices or at least not necessarily material lower prices in those linear markets. So I think people that have an existing property with fixed rate debt in a linear market, I think they're in decent shape. Whereas obviously the challenge is for people that are trying to buy a new home with financing. That's where the whole. It's almost shut down.

Yeah, yeah. So it's this strange thing like activity in some markets is down like 35%. So that's very bad for people in the real estate industry. Right. They're certainly hurting the brokers, the brokerages, the title companies and you know, the mortgage companies. They're just devastated. The interesting part about that is that the only sellers that have any real motivation in mass are home builders, the resale homeowners, those 140 million or so housing units in the country. I mean they've got 28, 29 years left on these ultra cheap mortgages and they're going to protect those mortgages. They're not going to let them go. Whether they have to beg, borrow or steal, they're going to try and keep those cheap mortgages, in my opinion. Lynn, I want to show you a chart and I've shared this chart on the show before, but I want to show it to you because it speaks to the comment you just made about how the resale market is sort of seized up in the sense that nobody wants to sell their home. And here's why. I mean, 24% of the country has a mortgage of 3% or less in interest rate and they've got 28, 29 years left and 65% of the country has a mortgage below 4%. And what this chart doesn't tell you is that 40% of the homes in the country are free and clear with no mortgage whatsoever. I mean, I have been calling this the poison pill that the Fed has put into the housing market that'll last for decades. Now by poison pill, I mean that's not all bad. It's bad for activity and people that want to buy a house, that's bad for them for sure because there's going to be really low inventory going forward and people that just don't want to give up these mortgages. It's good for the remodeling industry and the home improvement industry because people stay put and improve the, the house they live in, whereas they might not have been that motivated to do that before.

You know, what do you, what do.

You make of this? Any thoughts?

So I think you phrased it well. Basically it's not good for, for new home construction in many ways, but it is good for, for companies that are servicing existing homes. People are expecting a massive crash in housing prices. And I think that those expectations are overdone because of how much of the supply is just not going to move. And so only around the margins, only over time will some of that happen. Now obviously in some very excessive markets, you know, very cyclical, bubbly markets, those come down a lot faster.

Those, those will have already and they're going to continue to decline in my opinion.

Yeah, my view as well. Whereas the linear markets, basically I think that, that to the extent that people have a reasonably priced home with a low, with a fixed mortgage, I think they're, they're in pretty good shape. And it's really those people that work that they rely on the activity of the industry. They're the ones that are mostly challenged. And so that, and that ripples through everything else because obviously then those people, they lose jobs or they have less income, they go out and buy fewer things. It impacts those businesses. So we have basically the types of places that are losing their jobs are these more industry focused, sensitive industries. The same thing actually happened to tech in ways that surprise people. So we think of the housing market as very interest rate sensitive for obvious reasons, because it's very leveraged. Whereas in the tech sector, because unprofitable growth companies, right, they're, they're very reliant on interest rates being low because what they did was they would just issue tons of equity. And if, if the cost of capital is nearly nothing, if you're investing in this long term promising idea, people pay up almost anything for it. And so they use that overinflated equity, that's what they pay their employees. You know, the shareholders don't scrutinize their lack of profits, it's able to kind of grow. They don't have to raise their prices very fast because they're not worried about being profitable. And so it actually supercharged their growth because they're able to undercharge as long as those conditions last, which they don't last forever. And so now that there's actually cost of capital, you see a sharp reduction in the valuations of these growth oriented companies.

As you should.

Yes. Compared to value stocks that are just kind of chopping along like nothing happened. And so now those companies are raising prices because they have to be more profitable because they can't just rely on constantly issuing new equity to their employees and things like that, which then slows down their growth because some of their Growth was just artificial to begin with because they were purposely under charging. And so you have a whole slowdown there, which results in layoffs, which then trickles through another thing they laid off. People buy fewer things, they cut back. And so essentially that's what we're seeing is that the, the overall economy is soft, but it's emanating from these industry sectors, from people that work in real estate, from people that work in tech, things like that. Whereas restaurants are fine, many other types of businesses are fine, and only after a long enough period of time from less buying activity, from these more sensitive sectors, do you start to see a more broad based recession.

Yeah. So that means the people getting laid off will obviously spend less and then that trickles through the economy. But I always want to go to the. Compared to what? Question on that. And these companies were dysfunctional when they were supposedly working, you know, when their stock was going up in price and, you know, they, they were not functional businesses. I mean, this is just a, a real pet peeve of mine. The, the way these completely dysfunctional companies get all this money thrown at them. I'm more than happy to see these layoffs of these people that didn't really have real jobs that were platform analysts at Facebook. I mean, give me a break. Like, you know, I saw a YouTube video just yesterday about a woman who was laid off from her job at, I think Google. Yeah, it was Google. You know, she formerly made videos of her job and how, you know, she would go to the cafe and then get a massage and, you know, I mean, this is not a fucking job, okay? Like, you know, get to work like the rest of us, you know, and there's just too much fat in the system. That, that had to go. That was not reality. That was a fantasy. You know, these, these cafeterias with these gourmet meals and I mean, what do you think? You know, that's. Those companies are overfunded. They never deserve that much funding in the first place. And they would be better companies if they never got it because they would have had learned how to function like real businesses like your business, like my business. Like the vast majority of people listening the business they work for or the business they own.

Right.

We're burdened with reality. Right?

Yeah, I think it's, it was a classic malinvestment cycle and people extrapolating a period of time as though it's going to continue indefinitely. And so as money poured in, they could undercharge, they, they could pay employees whatever they want. They could have all these perks and so now that there's, you know, just fewer investors willing to overpay, in addition to cutting back on the fat of their, their employment, their perks, things like that, they also have to raise prices. And so in many cases though, it's not like, you know, partially that's, that's labor inflation, but it's also partially that those prices never really had any business to be as low as they were. Like Uber was always undercharging and now it's like those prices are resetting to what their actual market clearing rate is for a business that is actually sustainable.

And Uber is still not profitable, are they?

I mean it's realigning towards, you know, the, the, and that's just an example. But these, these types of companies are realigning towards losing money less quickly because you know, it's just they, if they're not able to issue high valued equity, they're, they're forced to suddenly increase prices, cut the fat as much as possible, which then slows their growth. And they, they realigned what they actually, you know, the actual product that they're bringing to market. Because some of these are innovative, they are, they are saving us time, they are useful. It's just that some of them had this like artificial growth on top of it because they were able to structurally undercharge because of this malinvestment. And it's kind of like a cycle as old as time. Once that, you know, once that, it's literally a Ponzi scheme where like as long as more money's coming in, it's able to keep growing, it can keep doing it. Yeah, one, yeah. Once you pop the pin, whether it's higher interest rates, whether it's something else change of perception when that capital stops flowing in or flows in at much tighter valuations and much more prudence and caution, suddenly a lot of that, that, you know, even though there is an underlying value there, the fluff on top of it has to just be cleared out. It has to just go away and those people have to find other productive work. And it's just this, it's, you know, just the market kind of realigning itself.

So the tech companies and the sharing economy, companies, I have long said that when those companies adjust their prices to reality as they're doing now, or they're just going under and being left behind, there's a lot of shadow inflation in the system because taking an Uber ride that used to cost $6, that's now $24, which is about, about where it is that's inflationary, right? That's a lot of shadow inflation in the system. And I think we're going to see more of that. And especially because the way these companies have operated has been so unfair in the marketplace because they underprice. They put the taxis out of business, for example. And, you know, I kind of relished that at first because I thought all these crappy, dirty taxis I've been taking, you know, all my life. And now Uber's so great, but it was artificially cheap. And that's really an unfair competition to underprice like that with. With equity, right?

Yeah. We see a similar thing in Airbnb, for example. So many people started focusing on those and saying, well, why do, why do I stay hotel? And now that Airbnb prices are actually starting to reflect reality, like, wait a second, like I can actually get better service for the price at many hotels in many cases. Obviously there's niche. It depends on the specific circumstances, how many people you're bringing, how much space you need, what exactly you're looking for. But it's like a lot of these things were artificially priced, and there's that. I forget who originally made the example, but they point out, like, if you have a business of selling $20 bills for $10, calculate what is your. What is your TAM, right? It's infinite. I mean, any, anybody who's, you know, if you're dumb enough to do that, your. Your growth is infinite as long as you can keep it up. And so a lot of these companies, they were unprofitable, they were undercharging, and they were estimating their total addressable market, their tam, as though it's, you know, the world. And it's like, well, when you actually start selling $10 bills for $11, right? $10, you know, then. Then obviously your TAM is going to just collapse entirely. Because the TAM never really made sense, at least. And that, at least that's the froth part that is built on top of these otherwise good businesses. Like Uber is great. It's just that if it was, if it was priced reasonably from the beginning, it never would have grown quite as quickly. The Uber drivers probably would have paid more, and fewer taxi people would have been put out of business, or at least it would have been more kind of fair competition. And I think in a higher rate environment that. That's the new reality that things have to adjust to.

Yeah, absolutely. You know, the old saying, we lose money on every deal, but we make it up on volume. That doesn't work. That's a Ponzi scheme, as you have very correctly said. The last thing I'd just like to touch on, on that is you look at the platform oriented tech companies, social media, and then search like Google, you know, they have been shielded unfairly. Not just have they had too much money thrown at them, but they have been shielded by the Communications Decency act. And they have had an unfair ability to compete in the marketplace with traditional media like newspapers because newspapers have liability for what they publish. Yet Google can adjust their search results and we don't know why we're seeing what we're seeing. And Facebook can say, you know, we're just a platform, you know, we don't have any liability for anything. And that is the same concept that you've alluded to. And it's, it's very unfair. So there's a lot of these imbalances in the marketplace and, and the playing field has just got to be more level. But it is what it is. What would you like to wrap up with, Lynn?

So I think we covered most things. I think, I think that's the main thing to focus on is that some of these things are structural, that there's a cyclical component to some of them, but that I think that going out this decade, I think a lot of these inflationary pressures are going to be structural and that just like most inflationary decades, it's not a straight line. And so there's, there's periods of, you know, it gets ahead of itself and then the system fights back. We're in one of those fighting back periods now. We're trying to get control of inflation, trying to raise rates, trying to track the economy. But I think that it's there, it's ready to reemerge the inflation as soon as we stop actively pushing it down. And we can only push it down so long before you run into all sorts of problems. And so I think investors had to be prepared for when you look out to 2024, 2025, another round of this inflation. Because I don't think this is fully out of the system system yet.

Yeah, I, I think you are very right about that. Give out your website and tell us about your newsletter.

So I'm@lynnalton.com people can check out my work there. I do a free newsletter that comes out every six weeks and so people should sign up to that. And then literature that like that, I do a low cost research service, comes out every two weeks and I cover things a little bit more tactically, a little bit more specifically. So people can check out whatever, you know, public articles, public newsletters, you know, know, research, whatever.

Good stuff. Lyn Olden, thanks for joining us.

Thanks for having me.

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