397: Economic Boom or Bust? - with Dr. Vikram Mansharamani

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It is my pleasure to welcome Vikram Mancharmani. I enjoyed his book on Boom Bustology. That's the name of the book. That's one word, by the way. Boom Bustology. It's really an honor to have him here. I just finished the book a couple of weeks ago and as I was going through it I just had so many questions. So he's coming to us today from New Hampshire and it's good to have you, Vikram. Welcome.

Thanks for having me, Jason. I'm thrilled to be with you.

Well, likewise. So spotting bubbles in markets, regardless of what type of market they are, stocks, real estate, cryptocurrency, precious metals, tulips, whatever you want. Right. There are certain lenses which one can look through to kind of help filter understanding whether or not you're in a bubbly territory. And you say it's not binary. Right. It's not like either you're in a bubble or you're not. It's not that exacting, I guess.

Sure. Well, I guess the key message I would say is that it's probabilistic. There's uncertainty around it.

Right.

You can't call a bubble with precision at the exact time, or at least I don't have that skill. And I don't think there are many people who do. And so you're right, Jason. What I've hinted at and I talk about in my book is that every lens is biased and incomplete and therefore limited. And so what we want to do is if we think each lens is probabilistically pointing us in the direction you almost want to think about it as put one lens in. What do I see? Oh, it looks bubbly. Another lens bubbly. A third lens bubbly. A fourth lens bubbly. A fifth. Well, if you see all of your lenses pointing towards bubble dynamics underway, well then you can have greater confidence that the risk is to the downside, not to the upside. And likewise, if you only see one or two of these lenses saying, hey, you might have more confidence to stay invested and say, you know what Maybe this is actually the more profitable point of a bubble where it's just starting. And so that's how I think about it.

That's good. And are there a total of five different lenses?

Yeah. So. Well, I wrote about five in Boom Bustology and the reason was because the publisher wanted a nice round number. And so that was it. The reality is I'm a big believer and fan of the more the merrier. So the five I talk about in the book are, number one, price action. You know, normal supply and demand dynamics that all of us Learned in Economics 101 are that when prices rise, you expect supply to show up, not demand. But in fact if you have higher prices driving more demand, which in fact drives higher prices, which drives more demand, you've got a self fulfilling bubbly dynamic underway. Doesn't mean you have a bubble, just means you have a bubbly dynamic. So that's lens one, which is price action inspired through microeconomics. Lens two is really about macroeconomics or credit conditions. And this has to do with whether the price of money is appropriate. And so if the price of money is too cheap, rarely I think has it ever been too expensive. And so if the cost of money is low, well then people will use it more frequently or in greater volume than they otherwise should. And as a result of that you get misallocated capital. And so that is a sign of some real concern because if people are free with capital, they're not appropriately weighting risk, then they end up perhaps being a little less disciplined in their capital allocation processes. Lens three is psychology. And that has to do really with some of the behavioral aspects. This sort of fear of missing out the new, new thing that's going to change the world. It's different this time. There's lots of ways to describe this dynamic, but that's really a psychology inspired lens. Lens for is politics and sort of regulatory dynamics. And this is where you have subsidies, tariffs, other sort of floors or ceilings on prices and dynamics like that that shift supply and demand perhaps artificially, you know, change to tax policy where people go sprinting to go buy, let's just say for instance electric vehicles or let's just say SUVs that are more than £6,000 or you know, et cetera. So you can get a couple of dynamics at work because of tax inspired or regulatory or political inspired dynamics that change the supply and demand dynamic.

The government is famous distorting markets.

You got it. That's right. And the last one, just really quickly to wrap up here, the Fifth lens is really about herd behavior. You know, when popular sentiment shifts onto a topic, it's generally getting, quote unquote, long in the tooth, the phenomenon. So if your bell boys talking about you go to a hotel and you check in and the bell boys talking about flipping condos, you know what, probably not a great time to get involved with the condo market. Or when your taxicab drivers are talking about the latest cryptocurrency or coin that they bought and they just made a million bucks on it. Well, you know, probably too late. The phenomenon has spread too widely. There's fewer people to quote, unquote, infect, and there's less fuel to pour on the fire. So those are the five lenses.

Very interesting. So you qualified that when I asked the question saying that you wrote about five in boom, bustology. Are there more there?

Sure. I mean, okay, so for instance, a cultural dynamic, I think comes into play. You know, societies that are more consensus oriented. And by the way, this was really on full display in Japan.

Yeah, I was going to say Japan.

That's exactly what census oriented society. Right. I mean, it's a harmonious group dynamic. Confucian culture, if you will. Right. And so all of that logic suggests, you know, outlying individual thought is maybe not respected by that society. And so surprise, surprise, consensus rapidly formed that the thing can only. The markets can only go up. And so everyone got. And then you get these weird dynamics where, I don't know, I forget what it was. You know, some portion of the emperor's grounds were worth more than California. California or something like that.

Right. I remember that one.

Really weird dynamics emerge because of that consensus, herd behavior. So then I would say there's some cultural elements there. Yeah. My guess is there's others that we can come up with and talk about. But the idea is all of us can be commonsensical about it and sort of say, hey, does this make sense if everyone's on one side of a boat, it's going to tip.

Yeah, exactly, exactly. And you know, you can see that consensus dynamic go on in committees all the time. And this is why the world cannot be run by committees. The world needs to be run by leaders. And yeah, that's definitely true. I've noticed that many times. So the million dollar question, everybody wants to know the answer from Vikram. Are we in a bubble?

It's a great question.

Maybe by asset class, precious metals, real estate, cryptocurrencies, and maybe even those, you got to separate them, like Bitcoin. And then everything else, stocks, commodities, everything. I mean, the thing that's tricky now, that is we've got these supply chain problems that are sort of distorting markets as well. When you have this kind of supply demand shock issue, you can't tell if that's real limited supply or it's supply chain or the demand is really that high, or people just want it now because they want it now rather than waiting. Right. So it's hard to. Hard to interpret that a little bit.

Yeah. So you just asked, I think, 12 questions.

Of course, I am the king of the compound question over here.

So, Jason, I think you asked about inflation, deflation, and insofar as that affects supply demand, you asked about sort of, I think, seven or eight different asset classes. And then you asked about generically, are we in a bubble? So let me begin by suggesting that.

A long answer.

I'm going to give you a long answer. So let me begin by suggesting that all of us as investors are 100% certain to be making mistakes. All of us will make mistakes. However, I want to suggest that we can choose what type of mistake we can make and the type of mistakes we can make. We can either make the mistake of commission or a mistake of omission. And the commission is we do something, we make an error of commission, which is we do something we shouldn't have done. And the error of omission is we did didn't do something perhaps we should have done. And those are the two primary types of mistakes we can make as investors. And, and as a result of framing it this way, what I want to suggest is that when the risks are elevated, let's choose to make the error of omission. Let's miss the next 5, 10, 15% upside, but not capture the 20 or 30% downside that might follow it. Whereas at certain points in the cycle, you may feel like things are so depressed they can't go much down. And you might go ahead and get involved in an asset class. And the error of commission may be better to make because, yes, you may lose 5 or 10%, but you'll capture the next upside of 100% or 150%. And so I would frame it in that way, which is there are times of elevated risk where we're going to choose to make the error of omission. We're going to miss the last bit of gains and there are times of elevated depression or sort of despair where no one wants to own anything. And yes, they may continue to fall further, but we should make the error of mission at that point in time. And so with that framing, let's go ahead and talk a little bit about the different asset classes you raised to see whether or not they're sustainably rising, whether they're likely to fall or what have you. And so the way I think about many nominally priced assets is we have to look at effectively real interest rates. And so the way I think about that is you look at inflation and you compare it to interest rates. Well, today, depending upon which measure of inflation you choose to use, you may have a 5, 6, 7% number running and interest rates are below that. So, Jason, it would be absolutely illogical for anyone who believes this to be the sustainable situation not to borrow as much as possible and deploy it into nominally priced assets, whether they're stocks, whether they're real estate, whether it doesn't matter. Deploy as much as as much money and leverage as you can get. Go forth and do it. Now, of course, none of us believe it's going to stay this way. And herein lies the delta of opinion that results in some variability of perception. Right. Which is, okay, well, the inflation's only temporary. It's transitory or whatever the word may be. Right. It's temporary, it's going to pass. Maybe, maybe not. We can talk about that. But the interest rates are the other side of that equation. Are they going to rise? Well, regulators have hinted that maybe they do need to rise, that maybe there is in fact upside pressure on the cost of money. And that of course changes the dynamic on a lot of different assets. So theoretically, that's how I would frame the questions you've had around the different asset classes. Now, I'm happy to let you ramble through each asset class and I'll give you my quick thoughts on them if that's helpful from here.

Okay. Metals. Precious metals, yeah.

So precious metals, I believe specifically are monetary equivalents. So I don't even think of them as assets. I think of them as sort of anti assets. So what's your faith in fiat currency? If you believe central bankers will continue to print and there'll be monetary debasement, continued structural, politically motivated, well, then every dollar you have in your pocket will likely be worth less than purchasing power over time. We've seen this over time. This is what happens to fiat currencies as a result. I want currencies that can't be printed. And if we think of precious metals as a currency, and you can debate how you deploy that, how you purchase precious metals, are you buying a mining company which has operating risk or leverage and idiosyncratic risk per asset, Are you buying the actual metal and you're going to hold it physically, you're going to hold it in an ETF that has some counterparty risk and some other. There are different ways and we can get into the nuances of those if you want. But generically speaking, I think if you believe in prudent central banking and that central bankers and political motivations will not infect monetary policy, then precious metals, you might say, have very little role. However, if you think political manipulation, monetary debasement and these trends are likely to continue, I personally do think so. Well then you have to think about precious metals as one divided by your confidence in central banking. And if you think low confidence that they'll continue, you know, low confidence that they'll be thoughtful and sort of think about their long term debasement impact, well then you'd have higher confidence in the long term value of precious metals or non printable currencies. So that's how I think about that.

Good points. And sadly, you know, with every asset and every political issue nowadays, everybody's thinking just for their tenure in their term. So Jerome Powell and you know, and Biden, if he's thinking at all, you know.

No, no, listen, Jeremy Grantham, a dear friend of mine here in the Boston area and someone who's been a mentor and has guided me a lot in some of my thinking around bubbles and endorsed the books I've written, et cetera. He talks about career risk and the investment professional is driving unbelievably unsound decision making. Right? I mean, he talks about in 1999 running around to a bunch of professional money managers, hundreds of them around the country, around the world and saying how many of you think we're in a bubble that will burst and virtually every hand goes up in the aud. How many of you have decided to act on it by removing exposure to equity markets? No one raises their hands. And he's. Because the risk of going out of consensus is too high during that little one year window you're getting measured against for your job, that you can't take that risk. And so professionals tend to focus on their careers rather than on the actual long term investment performance.

Yeah, well that one doesn't surprise me a whole bunch, but sadly it doesn't. It should. Yeah, very interesting. Okay, so the next one is really loaded. But so many of my listeners are real estate investors, as am I. That's my favorite asset class. But an ounce of gold is an ounce of gold around the world. A piece of Real estate is very different and fragmented into so many different types of markets. And just to maybe help you think about this, what we do is we analyze them and divide them into three major categories. Linear markets that are kind of slow and steady and boring, that chug along and appreciate without giving a lot back during recessionary times, but they don't have roller coaster highs during the good times either. Then cyclical markets that are the opposite, that if you're looking at a graph, it looks like a roller coaster, ups and downs and then hybrid markets which are in between the two, as the name would imply. And so we like to invest in these sort of boring linear markets with really good cash flow. And you know, they, they haven't come up a whole bunch, although they have come up surprisingly high given all this cheap money out there. But you know, when I ask the real estate question, you know, if you can speak to that, please do. If not, just I'll ask you. Real estate, what do you think?

Sure. So the way I think about it is, you know, real estate is a highly leveraged asset for most investors. Right. You put a little bit of equity down, you borrow a lot of money, you get some cash flow, you sort of of service your debt, you get some appreciations and principal pay down, etc. So there's an element of financial engineering that generates returns. Very sound financial engineering that's based on a handful of potential depending upon the individual investing in IT tax policies. Right. I mean, is small. Individual investors may say, well, I can deduct this, I can do that, et cetera. You can depreciate the asset value of the building or the improvement to the land. So there's different nuances and I don't want to get into those generically speaking. I would suggest that real estate is inversely directional to interest rates. Interest rates go down, we're going to have real estate prices go up. Generically, very high level base operating assumption. Of course there's nuances by different subcategories, et cetera. And then it comes into the question, which you hinted at earlier, which was inflation versus deflation and which do I think is more likely? One of the dynamics I can point to with pretty good certainty over long periods of time is that the most powerful force I know of affecting these dynamics in the capitalist society is technology. And technology is, as all of us are feeling today, more and more impactful on the lives of every. By the way, technology is also what I would argue the most powerful deflationary force out there.

I agree.

Which, Right. We're able to do more with less.

Absolutely.

That is by definition productivity. That is by definition more supply. More output. More output. All else equals, you know, lower prices.

Right.

If you have the same demand but more output, you should just get lower prices.

I couldn't agree more. I, you know, I always likened it to this. There's a war, basically, or a boxing match. In one corner there's bad fiscal and monetary policy, that's inflationary, and in the other corner there's technology, which is deflationary. Who will win? We have yet to see. But you know, if we didn't have the tech, inflation would be insane. I mean.

Yeah, well, I'll go further than that. And I would say, depending upon your time horizon, I could convince, my guess is you and others, that the structural underlying forces, because of capitalism, as long as we retain capitalism, you don't get social unrest and revolution, which is a risk. Risk. But if you got a capitalist society that incentivizes innovation, that generates technological advancements. And also there's an interesting systematic feedback loop here, produces wealth and education that results in more often than not, lower birth rates. So you then have a demographic tailwind or headwind, depending on what you want to your approach. But generally we have a society that's age old, they're having fewer children. And when you have a society that moves towards fixed incomes, they tend to spend less. People on fixed income spend less. And when you're spending less, all else equal, that's less demand. So now we just talked about the two most profound structural forces that would affect an economy, which is, you know, technology and demographics over the long run. And we're not going to talk about 1, 2, 3, 5 years. This is, we're talking, you know, 5 plus years and we're talking about less demand and more supply. That suggests prices go down, not up.

Right.

Forget about our supply chain disruptions today. Forget about the inflationary pressure.

I agree. And there's that book, Empty Planet. Yep. You know, most people think the world's overpopulated, but let me tell you something, just wait 30 years.

Yep.

We need to have some kids. I mean, well, Jason, I do.

I do a lot of public keynote speaking at different conferences around the world. And when I do, I often run around the world and I say, hey, listen, let's look at the demographic situation. The United States is aging, Europe is aging and actually starting to shrink. Russia, Japan, shrinking.

Yeah.

China is plateauing. People think China, they're plateauing and they will shrink. Why do you think they've said, hey, forget about one child. Let's get two children here. And people aren't doing it. Japan shrink so suddenly we're looking at the world's largest economies all aging, moving towards fixed incomes and therefore less spending. At the same time, technology is producing more. So from a structural demand story perspective, or a structural supply story perspective, we got deflation. And this is a way to bring it all back, which is I gotta believe that whatever happens to interest rates in the next 1, 2, 3, 5 years on a 10 year type view, I don't see strong upward prices and in the cost of money as a result. It also means to me that real estate over the long run should continue to be a profitable place to play.

Yeah, it's interesting too, and I'd love to just have three hours with you and go off on lots of tangents, but I'm curious what you think about this. This because you know, you can't have a country without people. Japan will literally cease to exist because of their zero birth rate. You know, they're, they're going to have no people in 70 years. Okay. You know, unless, unless there's some massive increase in longevity. But China, everybody thinks China's taking over the world. And I gotta think, you know, you give it 10 years and even 15 years and China has a huge demographic time bomb. You know, it's hard to think that when you got 1.6 billion people, right? But just wait.

Yeah, that's right. Well, it's interesting. So two things I would point to. So the, the traditional analysis that suggests Japan is really heading to a brick wall, right? Because they're going to age away and there'll be no one around and it'll just. Two caveats are worth highlighting. Number one, immigration.

Well, they don't do immigration there.

Well, that's my point. They may have to. They may have to, right? I think they don't want to. They, they haven't. But will they enough people aging? Do you need some Filipino nurses to show up to help? Do you need some. Okay, so that's one thing. Second angle to think about is the role of technology in this world and how we advance. Is it conceivable that a country like India would really struggle to implement technology that removes jobs and so they would have a tough time really advancing. Whereas Japan, where everyone, they can implement technological innovations and it's not socially disruptive, right. You can act because people are retiring and you need that job done. I don't want to bring in an immigrant. Let me bring in a robot.

Right.

And so that could be a potential dynamic that enables a sort of greater longevity, perhaps greater innovation, other dynamics that might actually extend the story. But I think you're right. You know, you'll love this, Jason. I was teaching this class on financial bubbles down at Yale University probably a decade ago. I was teaching this class and one of my students comes in one day and said, you know, Dr. Manshiramani, I figured it out. I know how to solve the Japan problem. I said, oh, please, this is like there's trillions of dollars riding on this question. Share it. He said, we got to get a nice big ballroom, lower the lights, get some nice romantic music, and bring the boys and girls into the room. We'll be all set that 18 years later you'll solve this problem. You got to do it widespread across every school. And I was like, okay, I got it. You're right. It's a demographic problem.

Yeah, right.

So there's different solutions, I guess. Right.

But it's, it's so. It's so dysfunctional in Japan. I mean, women are having weddings by themselves, these solo weddings. It's just weird. The. The men are just playing video games and I'm sure watching porn. You know, they don't interact. And now you bring the metaverse into this, and that is really going to lower the birth rate, if you ask me.

I think you're right. No, I think you're right. I think that we haven't thought through the demographic, the long term demographic implications of social media and this whole virtualization of life.

Yeah, yeah, you'd think it would bring people together, but it actually separates people. It's a, it's a. It's a wall of technology. It's like a new kind of iron curtain. It's a technology tech curtain. But we got on a tangent there, and I love getting on, going down the rabbit hole with you, but what was the real question? So. So real estate. You're. You're pretty good with real estate, it sounds like.

Well, what I would say is. What I would say is this real estate is so much more complicated than anything I could get into here today. And you know better than I. You want to. Every geography is very distinct and unique. Every asset class, whether it's student housing, which everyone thought for the longest time was great, except when people move to virtual education, suddenly education is less valued. Well, maybe it's not. Or, you know, warehouse space. Oh, well, who needs warehouse spaces if everything's getting shipped to the home? Well, suddenly, last mile warehousing space, really interesting booming.

Yeah, right.

I Mean, so office space. Oh, everyone needs offices. Well, what if you all move to work from home and maybe you don't want office space? You know, I talked to one big global company that has, you know, hundreds of thousand plus employees and they're reducing their office or their real estate footprint by 30% in the next five years. Yeah, this is a big headwind for that segment. So I would just suggest my bias is positive towards real estate over the long run. But demographics are going to come into play, the segment's going to come into play, the geography is going to come into play, et cetera, et cetera, et cetera.

And housing is the most reliable of any of those asset classes in real estate. I mean, the office space, Terrible. Industrial is doing pretty good given the last mile and so forth forth. But you know, there's drones, there's other disruptors, I don't know, you know, we'll see. It's complicated, of course, but I'd say office space is. The office and retail are, are the most risky of the two in the real estate category, residential being the least risky of all, and, and medical office as well. But some of that is going to be done at home. More and more of that is being pushed into the residence with technology, so that's being disrupted as well. And you know, so many good things came out of COVID and one of them is, you know, every industry was forced to modernize. I mean, the legal profession is now using Zoom. Oh my God, it's like a miracle, you know, that a lawyer could use Zoom. To them it's a foreign idea. Medicine, same thing. Telemedicine. So we're seeing some really good stuff come out of this, you know, crisis we've been in as well. Okay, so I'm going to ask you the other big one. Stocks.

Sure. Equities. Well, it's again here I would say one needs to be also more nuanced between growth, value, some of the other things. I saw a stunning chart at one point and I haven't seen an updated version of it, but it was the Goldman Sachs index of non profitable technology companies. And it was a vertical line going straight up. And the reason I bring that up is that was a vertical line going up months ago. My guess is it continued to go up even after I saw it. And maybe it's pulled off a little bit recently here. But the reason I bring up that one is there's an element in the market today of this growth is coming, it's out in the future.

Yeah.

You know, five years from now, ten years from now, this is gonna be a trillion dollar business and it's gonna have, well, well, just think about the discount rate one uses to bring it back to the present. If we change that discount rate, suddenly my 2030 assumption of profits is worth a lot less in equity value today if I take that discount rate up. And as such, I think we need to look and see what people are thinking about the future.

And we also need to look at what happened 21 years ago with the first dot com bubble. I mean, let's not forget the that.

Sure, that's right. That's right. We get ahead of ourselves. The world is always going to be different, but this time it's different phenomenon can be really risky when applied to concepts such as valuation. And so I'm cautious on equities. Generically. I do think there's probably some segments of the value area, things that are not in predominant indexes. The ETF and passive investing bubble that's been brewing I think has distorted the delta between security that's in an index versus one that's not in an index. So there's different market cap, sort of, perhaps inefficiencies that exist. And I'm a contrarian by sort of nature. Right. I was studying China when people were studying Japan in the late 90s, or sorry, excuse me, the late 80s, early 90s. I'm intrigued by value investing opportunities today. You say, well, distress. There's no distress. The world, world's on fire. How's their distress? When you find areas that are sort of beaten up, they kind of draw my attention. Right. If they've got a means to survive. And so it's a different form of analysis that one needs to think through to find those opportunities. But generically speaking, large cap growth, where a lot of the future returns are in that discounted future years, I'm a little more cautious on those today. And not because I think there's a huge inflationary spike that's likely to come, but I do think the cost of money will rise, the discount rates will shift, and as that happens, the equity value embedded by discounting back a series of future cash flows will be worth less today. Yeah, that's it. That'll be an adjustment.

Now that's a very good point. So in other words, these tech companies with this sort of infinite scalability that they're selling, which makes their PE ratios psychotic, okay, you know, maybe they can scale and take over the whole world, but how much time will that take before that return comes? That's a You got a discount for that? Of course. Perfect.

No, that's exactly right. Yeah. And you can look at that, whether it's autonomous vehicles, whether. I mean, there's a whole list of things that are coming that are going to be great, which may in fact be great. But you know, a lot of people forget Amazon, which of course scaled. Amazon went down by 90 something percent.

Oh, yeah.

During the 99, 2000 bubble. 90 something percent. It fell. Of course, it came to dominate. And people said it would dominate back then. Didn't prevent you from taking a 90 hit on your equity position.

Right, right. And most investors get just too scared and frustrated and sell at that point, unfortunately. And that makes the decline even worse, as we know.

That's right.

Did you write about. I'm glad you mentioned indexes, Vikram. Did you write about indexes in Boom Bustology? I think you did. Right. So that.

Yeah, the second edition of Boom Bustology had a chapter asking whether or not we were in the midst of a passive investing bubble. And so that indirectly gets at the index investing logic, because that's the predominant way of passive investing. I think people have expanded it to say, I'm passively investing in these ETFs that are narrower and narrower and narrower. And I wouldn't call that necessarily index investing, although they think they're passive.

Right.

So. So the idea of passive investing was, look, there's all these active investors out there and they're fighting and battling it out between buying and selling. And as a result, the prices are right, the prices are accurate. And so therefore don't waste your money paying a manager to figure out what the price should be. Just buy the basket, minimize fees, and you're good to go. You'll get the market return. And that's generically a very sound philosophy. However, any good philosophy taken to the extreme turns into a bad philosophy. And so just hypothetically, Jason, let's even just do a thought experiment here. What if everyone was passive investing?

Right. No one's thinking right.

Exactly. Hence the title of my most recent book is called Think for Yourself. But if everyone is passively investing, then there's no active price discovery and prices will move based on flows in and out. Now everything good, security, bad security, one with good news good, earnings bad. It didn't matter. They'd all go up in sync or down in sync based on inflows or outflows. So flows come to dominate fundamentals. So we all agree that's going to distort markets. Well, now the question is what degree of the way There are we. Because we're going.

That's the question. So, you know, Jack Bogle obviously revolution. The late Jack Bogle obviously revolutionized the whole, whole investing world with, with Vanguard. But it's really scary because you get into this sort of mob mentality, right? People just throwing money at here. I'll just take the S and P, I'll just buy the 500 and not think about it and I'll let it ride. And there are so many books written on this around the Vanguard idea, which is just let it ride. And you know, so many people read the classic random walk down Wall street and you know, you can't beat the market idea, right? Which is true, I guess, until it's not.

Well, it's true in aggregate, right? So you could argue in aggregate. If even if you had people beating the market and you had some people missing, losing out to the market and you had some fees embedded in there, in aggregate, on average, the investor would lose. Now, there's a lot of assumptions of in aggregate and on average. Right there.

That. Right.

I love it when people talk about on average. Sorry, since. Since you've taken a little bit, little deviations, I want to take one real quick here. So people, people often ask me about, like, what do you think about Chinese economic growth? And, and they say GDP per capita is rising. And I said, whoa, whoa, whoa, hold on a second here. You're talking about on average. And if we want to talk about on average, I want you to get up here on stage next to me. I'm going to put a bucket of ice water here and a bucket of boiling water. Put your left foot in the ice water and your right foot in the boiling water and then say on average, you're comfortable.

Right?

Okay, so we're losing a lot of nuance when we talk about on average, et cetera, et cetera. Anyway, sorry for that.

No, it's a great metaphor. It's perfect. People need to hear that.

Come back to the idea you were getting out of passive investing. I do think it's a problem because ultimately what we're talking about with passive investing is buying and selling independent of price, independence of price. Well, hold on a sec. I always thought you wanted to buy low and sell high. And so the operating assumption that prices are always right misses the fact that the world has transformed from one in which passive investors were price takers into a world where today, in many markets and submarkets, passive investors are price makers, not takers. And so what they fail to realize is that creates an embedded Momentum in some of these market cap weighted indices that are passively, that are disproportionately, passively run. Right. So, all right, we're gonna buy the s and P500. And so inflows go in and disproportionately the largest market cap companies need to get the most flows because of their market cap weighting. Well, it turns out that means tomorrow, all else equal, the largest cap companies went up a little bit more because they had more inflows. Well, now you reweight the index and now they got to get more inflows. And so you get a de facto momentum strategy here.

I know, which is fine, fine.

It's a virtuous cycle while it works and it'll be vicious when it doesn't.

And it creates more of this winner take all problem. Yes, which, which, yeah, yeah, so, but.

But the, the caution here is that it's virtuous until it isn't and then it'll be vicious.

How do we know? I mean, you, you mentioned, and I agree with you 100% that it's a matter of degree, like how much money is chasing the indexes. Right. And if there's not much money chasing the indexes, then you're going to win because you're not going to pay an expensive manager. You're just going to ride the ride and not look at it and it's going to work. Right, that's the random walk idea. But how much is in now and how do we know when it's tipped?

Right, yeah. So look, we know from some aggregate data that we've now moved to more of the assets in the world being passively managed than actively managed. However, we also know that passive investors basically don't trade. So the active managers have disproportionate influence on price discovery, which is good. You still want price discovery to be as good. And so what I think we need to pay attention to is the flows. And the big ticking time bomb that I have on my radar screen that I'm watching is retirement. When people start, when we start seeing money coming flying out of retirement accounts now we've had a market that's continued to rise and so those retirement accounts have gone up. But if we start seeing a market that has some hiccups and you see some people say, you know what, I'm done, let's retire, let's just move it all to fixed income, I want to live off of it. We're good, we got that last juice up. It feels riskier from here forward. And you Start seeing an incremental, demographically driven, meaning a non economically driven rationale for selling, which is, okay, I'm at a different stage of my life, I'm done. Let's start liquidating. Oh, now we've got the risk of virtual virtuous turning vicious. So that's the one I'm watching. And it could be retirees, it could be accelerated. You know, Social Security dropping off, say, hey, we can't continue to afford these big benefits, so you got to rely on your retirement more and more. So I don't know what it is. Something's going to happen that may result in that flow shifting right.

Now that, that's a great point. And you know, the question is, that's a matter of degree too, because it doesn't all happen at once. It's sort of like there's certainly a lot of aging baby boomers out there that are hitting retirement age every 10 seconds or whatever. Right. But, you know, that age is getting put off. Do they really retire? Are they really taking money out? And, and the financial innovation, which. That term scares the hell out of me. But there's so many more ways you can borrow against those accounts now than before. So you don't have to cash them out, you can just collateralize them. That's right.

Well, you're right. It gets scary. And then the labor market today, which we can argue about, and we've already talked about how technology has the ability to take away some of these pressure points that are pushing upside inflation, whether it's labor wages, et cetera, the labor market is strong enough today that people say, hey, you know what? I kind of like hanging out with people. Let me go to this driver job or let me do that, I'll work for a hotel. And so people who are retired are coming out and just doing stuff to interact for social reasons with social jobs.

Which, which those people before used to be married and now they're. Now they're single. And, and, and so because people get divorced three times in their life nowadays. Right. Or never get married. And so they need that socialization. Whereas before they lived in one place most of their life, they were married, they had that social cohesion, which sadly, there's. The loneliness epidemic is terrible. So that's a very good point. Yeah, yeah.

So that brings people back out into the labor market. And while they're there and we, and we have this labor shortage and pinch, et cetera, it gives them additional feelings of cash flow so they don't need to liquidate the 401. We're fine for now. Got any money coming in the door? It's fine. The government gave it me more money. I was retired, sitting at home. They gave me a raise. This is great. Like, what do you want me to do? It's fabulous. I don't need to liquidate. I'm good.

Right.

When I would say if and when, I would say almost not if, when that liquidation starts. Given the demographics we know in the retired pop, the retiring population, I suspect we'll see aggregate impacts. And if we have aggregate impacts, then we have something to worry about.

Yeah, yeah. Very good points. Really good analysis, Vikram. Last one for you. Maybe the toughest actually. Bitcoin, sure.

No, listen, it's an interesting one. I've commented a lot on it. I wrote a piece in 2017 which a handful of journalists have pulled up. I don't know why, but recently I've been getting asked a lot about it. It was called Bitcoin Boomer Bust. And I wrote it when bitcoin hit, I think eight or $900 and a bunch of people were analogizing in the media that, oh, we've got our modern day Beanie Babies, we got the Cabbage Patch Kids of the day. And I was like, okay. So I ran it through my. I ran through my analysis at the time of five, six lenses. And I was like, well, if you're looking for Beanie Babies, you better look elsewhere because I don't see the downside.

Right.

This is in some ways a dynamic that you need to think about with bitcoin that's similar to the precious metals. Right. Non printable. Now I'm talking about bitcoin when we talk about crypto, not other crypto generally. Now we're talking tokens and all these other things that.

That's why I didn't say crypto. I. Bitcoin specific specifically is.

Yeah, Bitcoin specifically, I believe is thought of by many as a non printable currency sovereign, not printable. And in a world where people print and people take away, etc. Then you want to be having assets that can't be printed and taken away from you politically, et cetera. So I think there is a lot of reason why one can say bitcoin has a role. I'm not going to get into the valuation because I have no idea how to value this thing. I can tell you about the pressures up and down. The pressure up is if I believe monetary debasement continues, if I believe political risk exists everywhere in the world and I want some currency or some asset value that can, in theory, hold value independent of all those dynamics, then that's what I want. Now, you've seen regulatory action come after it. Now, what's interesting is when the regulatory action, whether it was in China or elsewhere, said, hey, we want to prohibit this stuff, you actually saw more buying. You saw more buying of bitcoin. And I think that tells you that people still think of it as a means to escape sovereign arms reaching into your pockets. Now, whether or not that retains its case, we'll see. I think there's a role for bitcoin. I think it'll exist. I think there's a role for decentralized finance. Bitcoin will probably play a role. Whether we'd call it a currency or a reserve asset. I don't know if we get there. Insofar as people called gold a currency, geez, gold went 2,200. I mean, there's a lot of volatility in gold, too. But over long periods of time, gold has proven to be a store of value over long periods. Why? Because people believed it would be. There's nothing inherently useful about a shiny rock that you have to pay to dig up and pay to protect. However, like fiat currencies, it's just a base in faith that it's worth something. The only thing is, it's not as manipulatable for political reasons. And so that's one of the roles. Bitcoin, I think, has some value. One can imagine in a world where the US And China and others are escalating their rivalry and you have global currency wars, monetary, et cetera, that bitcoin could have a nice support base of demand for that reason alone. So I think there's a role for it. I don't think it's a big role. It's not going to replace the dollar. It's not going to replace any big global reserve currency anytime soon. It needs to get some stability to be thought of as a currency. Right. Et cetera, et cetera. There's a lot of nuances there, but I'm not particularly negative on it saying it's going to go to zero. I mean, may go down. Yeah, sure, it could go down a lot. I can go up a lot, too. The pressures are there for either direction. But I think it's going to be regulatory. It's going to be regulatory pressures that tries to take the wind out of those sails. But the demographics, which is more millennial investors and younger investors that want to be more digital in their thinking, that want to be free and clear of government Manipulation, the global demand story, et cetera, point towards more upside, the regulatory pressure points towards downside, and we'll end up somewhere in between.

Yeah, yeah. Very, very good. We shall see. That's the toughest one of all, I think, is the bitcoin one. We've gone a lot longer than expected and I know we've got to wrap it up, but Vikram, just to want, wanted to ask you about your other book, Think for Yourself. Right.

It's called Think for Yourself, Restoring Common Sense in an Age of Experts and Artificial Intelligence. And it's really about how in this time where we're so dependent on experts and technologies to tell us what to do, that we've literally stopped thinking. And what I'm suggesting individuals do is take control of decisions, whether they're financial, health or otherwise, that what we need to do is put our decisions in our context. It's fine to go get expert insight, but the phrase I use in the book is we need to keep experts on tap, not on top, which is don't give up control, but take their input. And so that's the essence of it. I talk about it in a bunch of different walks of life, including finance. And in fact, I talk about some stories since we brought up Jack Bogle. I talked about Jack Bogle a fair amount. Jack actually funded my high school education when I was a scholarship kid at Blair Academy. So I got to him pretty well and he was really profound influence on my life. So, yeah, there's stories like that and it's. It's more of a storybook rather than a textbook.

Yeah, very good. Excellent. Vikram, do you have a website you'd like to share?

It's just my last name dot com. It's www.manshuramani.com. and you know, the one thing that individuals may appreciate your listeners, Jason, is that I've written Jesus, probably 100150020 short meaning 800 to 1000 word article on various topics of global affairs, inflation, deflation, central bank policy, Bitcoin, you name it, all those topics, the demand for food, demographics. And they're all on my LinkedIn profile. So people go to, you know, it's publicly available for free, no password. You don't even need to connect with me, although if you want to, you can.

Good stuff. Well, Vikram, you are just a wealth of knowledge. Thank you so much for joining us. Really fascinating discussion that I could easily carry, carry on for two more hours.

Jason. Thank you for having me, Jason. I really enjoyed it.

It's my pleasure.