GARY BRODE | The Hidden Cost of Government Spending

In our latest podcast episode, we delve deep into the intricate world of inflation and government spending with Gary Brode from Deep Knowledge Investing. As an investor, understanding these economic elements is crucial for making informed decisions in today's fast-paced financial landscape.

Inflation is a term that's often thrown around, but what does it really mean? Gary Brode challenges the mainstream narratives that blame inflation on supply chain issues or corporate greed. Instead, he directs the blame squarely at those who control the money supply. This perspective is not just about pointing fingers but understanding the root causes so investors can better navigate the economic terrain.

One of the key takeaways from our discussion is the inevitability of inflation. With government spending outpacing revenue, and the Federal Reserve's actions influencing the money supply, inflation seems to be an unavoidable reality.

But rather than despair, Gary offers actionable insights for investors. He suggests looking into hard assets like real estate and commodities, which can provide a hedge against inflationary pressures. Moreover, he highlights the potential of cryptocurrencies like Bitcoin as a store of value in an inflationary environment. Gary also sheds light on the misleading economic data often presented to the public. He warns investors to be cautious and not take government-reported figures at face value. Instead, he encourages a more analytical approach, considering the broader economic indicators and their implications for investment strategies.

The episode is about empowering investors with knowledge and strategies to thrive despite economic challenges.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Gary Brode: Even when you come up with stupid spending, people are against cutting it. And here's why. Everybody is in favor of cutting wasteful spending unless it's in their district. Well, you know we have 535 members of Congress, right? 100 senators, 435 members in the House. So 435 House districts, Phil, I guarantee you all 435 districts have wasteful spending. And everybodyys view is we should cut the other guys wasteful spending. But I like the stupid spending in my district. And so, you know, again, we'at a point where compromise means okay, were'going to spend money on the dumb things I want. You can spend money in the dumb things you want. See, weve compromised G day.

Phil: And welcome back to Shares for Beginners. I'm Phil Muscatello. Today we were peeling back the multiple layers of inflation, government spending and the broader implications for investors with Gary Brode of Deep Knowledge Investing. Hello, Gary.

Gary Brode: Hey Phil, thanks for having me back. Always good to speak with you.

Phil: And always good to speak with you because we know this is your favourite.

Gary Brode: Hobby horseary'it's not my fault the US government keeps making the same mistakes again.

Phil: And again and again and someone's got to point it out to them and you're the guy. Gary's latest ebook challenges many of the mainstream narratives around inflation, like the supply chain or corporate greed, and directs the blame squarely at uh, those who control the supply of money. But what does this mean for investors? Gary's here to share why he believes more inflation is inevitable and how we as an investors can avoid the Kool Aid we're recording today on Thursday 14th November. So by the time this comes out, things might have moved because these things are bit fast moving. But what is the latest view of inflation in the us?

Gary Brode: Well Phil, earlier this week we got a cpi, a Consumer Price Index that actually increased. So the core number, which excludes energy and food, that's been sticky for months, that hasn't gone down since May, but we actually saw an increase in the regular cpi. So when people talk about inflation, they're typically talking about the cpi. Earlier today we also got an elevated ppi, that stands for Producer Price Index, and that actually increased and is back above 3%. And the reason that matters is the PPI leads the CPI. So what happens is producers will have higher costs and that over the following quarter or two will make its way into the things that you and I buy and end up in higher prices. So we're seeing both of these things lift just two months after the Federal Reserve cut rates. Now, at the time I said the Fed's going to cut and it's premature. They're making a mistake. They shouldn't do this so quickly. And the proof that we were right is that inflation has increased since then. Now, inflation, I don't believe has increased as a result of Federal Reserve actions over the last couple of months. These things typically take a quarter or so to work their way through the system. It's not like the Fed changes the fed funds rate and all of a sudden everybody changes their pricing. But the fact is that they cut rates twice, you know, once last week, once in September prior to having inflation under control. So that's, you know, that's where we are as of today.

Phil: So, uh, what's causing inflation? But before you talk about what's causing inflation, what do people think is causing inflation? Where is the blame game being placed?

Gary Brode: Yeah, so, and we should talk about that. We should also talk about why there's a blame game, why it is in certain people's interests to obscure the source of inflation. You know, over the last couple of years, we've heard it's, uh, been blamed on the pandemic, Covid. Supply chains, Vladimir Putin, greedy corporations, greedflation, evil CEOs, the boogeymanrik shrinkflation.

Phil: That's another one that come out, isn't it?

Gary Brode: Yeah, exactly. So let's talk about why some of these ideas are wrong and then we can talk about who's really at fault here. So first of all, Covid did cause supply chain issues. Some of the ports were closed for a while, factories were closed. You had situations where like auto manufacturers, they would make cars and then they would literally just put them in the desert sitting outside unfinished because they were waiting for computer chips. And if ports were closed or manufacturing was shut down, really there were legitimate issues there. So people have said, well, that's the reason. No, it's not. And the way that we know that can't be right is because if

00:05:00

Gary Brode: that had been the case, prices would have come back down. So let's use an example. Here in the US if you live in Florida, usually around September or October, we see some hurricanes. Well, what happens when a big hurricane comes through? The price of water goes up. Uh, the price of generators goes up. Uh, if you're trying to buy when everybody else is trying to buy, you have momentary supply shocks and the minute that supply shock is over, prices come back down to normal levels. But that didn't happen with the supply lines and at this point were years past all of this being fixed. So that didn't happen. And blaming Vladimir Putin is as good as blaming the boogeyman. Nobody needs to prove it. Okay, but what does Putin really have control over? Uh, the only thing that Russia really exports in size is energy. O yeah, we did have a spike in energy prices in 2022. Guess what's happened since then? It's come back down. And that's the main reason why the core cpi, which again excludes food and energy, has been running higher than the regular cpi, because energy prices have been coming down and they back down to pre pandemic levels. We've seen Brent crude back in the seventy something dollar range. So it wasn't Putin or the boogeyman. People blame greedy corporations. That's a political attack. And one of my favorite lines on this, it is typically, and I don't care if you're listening to this, I don't care who you vote for. Um, deep knowledge investing is nonpartisan, but frequently the greedy corporation claim is made by Democrats when they're in office, which leads everybody to ask, well, why weren't they greedy when Republicans were in office? What is it about Democratic leadership that made the corporations greedy? I'm going to tell all of you, regardless of whether you vote left, vote right, whether you're conservative, liberal, I don't care. Corporations have always been greedy, that it is their responsibility to be so. And in a capitalist system, the way a greedy corporation makes a lot of money is by offering a great product at good prices or by offering a, uh, good product at great prices, basically offering their customers an attractive value proposition. Well, that's always been the case. And in a capitalist system, if a corporation gets too greedy, guess what? There's always competition, saying, we'll take lower margins, we'll undercut you. And by the way, that is how Walmart built themselves into the largest retail operation in the country. It is how Amazon built themselves into the largest retail, uh, operation in the world. It's how Costco built themselves into a gigantic membership business. It's now trading at like 50 times earnings, something like that. They all built themselves enormous businesses by competing on service, but really on price. So how is this happening? And they were complaining a lot about greedy supermarkets, but the net margins on a supermarket business have been around 1.4% for years. And to give you a sense of how thin 1.4% is, Phil, if you walk into a supermarket and you were to steal a dollar item, right, because it's too expensive. Greedy corporation, they don't need it. Want to guess how much that supermarket needs to sell to make up the loss from your $10 item that you stole? You want to guess how I know.

Phil: It'S going to be um, ten times as M much. They're going to have to $100, sorry, thousand dollars, $700. Like that.

Gary Brode: So the margins on this business are so thin that if somebody steals a ten dollar piece of fish, that supermarket needs to sell seven hundred dollars of other stuff just to make up that loss.

Phil: I. No, it's astonishing, Gary. It really astonishes me because we've got a similar situation here in Australia where the government is called, what we have a royal commission in into the supermarkets because they've seen our inflation problem is a bit worse than the United States at the moment. And so the government is calling this commission, uh, to look into the greedy supermarket chains to see how that they're ripping off consumers. And to me it seems like they're just pointing the fingers somewhere else. It's not our problem. It's these greedy corporations that are doing it.

Gary Brode: Right. And it's a very popular thing to do.

Phil: It's populist. Very popular. Yeah.

Gary Brode: Right. Though the politicians present themselves as the protectors of the little guy and you know, that evil supermarket, except if somebody could make money instead of it all know 1.4% net margin at a 0.7% net margin. They do that. You know, at some point you have to cover your cost of capital and these businesses run on very tight margins. So none of these things are accurate. And politicians have no interest in making them accurate. It's in their interest to obfuscate them.

Phil: And sorry, just one other thing here, I'll just get on my hobby horse because I've got a very good

00:10:00

Phil: relationship with the Australian Shareholders association who monitor many companies and they're quite annoyed about this because they saw the heroic efforts that the supermarkets went through during COVID to keep supply chains going and keep the whole of the nation fed. And then suddenly we turn on them.

Gary Brode: Sure.

Phil: I'm sure there's a similar thing going on in the US as well.

Gary Brode: Oh yeah, yeah. You know, these corporations are these people, they're heroes until it's in our. Right. I mean it was all the supermarket workers who were heroes and you know, in fairness, they were in the stores dealing with the public On a daily basis when a lot of people were hiding and didn't want to go out. And I understand that, I understand why that happened. I understand how people felt about it. But you know, now they're evil, right? It's about political expediency. And they're counting on the public to have no understanding of economics, not like your listeners or viewers. And they're count on. People have very short memories. And ah, certainly. Phil, what percent of the population do you think will pull the Kroger financial reports, their annual reports, and take a look and say, wait a minute, these margins have been 1.4% for years. Nothing really changed.

Phil: Well, they don't. And even if it is pointed out, because social media these days has people who were economists who will come on and talk about these sort of things, but just. It won't make it into the mainstream mindset.

Gary Brode: Yeah, exactly.

Phil: Yeah. Okay, so, uh, we've been talking about inflation. And where the blame is coming from is a time to bring up the MF words, Milton Friedman. Because many on certain sides of politics blame discredited Freedman Knight policies for our current woes. Whereas in fact he was the one that pointed out where inflation comes from. Tell us that story.

Gary Brode: Well, it's really simple. Inflation is a monetary situation. By the way, a lot of people don't know this. We now think about inflation. Somehow the definition of inflation has morphed into an increase in prices. But Phil, that is not the original definition of inflation. The original definition of inflation is an increase in the Money supply. And that falls squarely on the shoulders of Congress, aided by the Treasury Department and in conjunction with the Federal Reserve. Basically, it is overspending by legislators, by the government, aided by, uh, lax policies from central banks all over the world that are leading to inflation. And if you think about it, it makes sense, right? Corporations have in their best interests to keep prices as low as they can and earn a return because somebody can always undercut them. That's always something that they're risking. But here's what's happening right now, at least here in the US But I think it's really all over the world. We're seeing this in Europe, in the uk, in Japan, I believe, uh, based on what you're saying in Australia as well. But governments are overspending. They're spending far more in, um, in outlace, in just wasteful spending, then they take it in taxes. And by the way, this is a side point, but this is my hobby horse. I do not ever want to hear people refer to Tax collections as revenue. It is not revenue. Revenue is a voluntary exchange to mutual benefit. Taxes are not that it's not voluntary. They will. Men with guns will put you in jail if you don't pay your tax. That's why I pay my taxes, despite the fact that I object to it. I don't want to go to jail. But it's not voluntary. The government says pay your taxes or else. Ok, so that's my thing. Stop calling it revenue. But when governments overspend, here's what happens. In the US, Congress is spending several trillion dollars a year more than they take in in taxes. Then the Treasury Department says, okay, well we need to fund this. And so they monetize that. That's just a fancy way of saying they sell bonds, collect the money, and then give it to Congress to disburse. Right, to pay all these bills. And our government likes to act like all of that is free, but it's not. We have debt piling up. And here in the US our debt right now on balance sheet is about $36 trillion. Our annual interest expense this year costossed $1 trillion exceeding what we're spending, uh, I believe on the military. Um, and by next year, I think our annual interest expense is going to be in the 1.4 to $1.6 trillion range. So it's gone parabolic.

Phil: And of course, additionally to that, the deficit is $2 trillion. I believe at the moment the amount that the government is spending is $2 trillion a year more than what they're collecting in revenue.

Gary Brode: Yeah, 2 doars to 3 trillion do, depending. And please don't call it revenue collecting

00:15:00

Gary Brode: in taxes, but at any rate, that's exactly what's happening.

Phil: Sorry, I've been programmed, Gary.

Gary Brode: Yeah, exactly.

Phil: I'm here for DEP programming.

Gary Brode: We're deprogramming everyone. But Phil, that's just the on balance sheet. Nobody thinks about the off balance sheet, uh, accruals. And you're like, wait, what is that? That sounds confusing. Nope, really simple. We are accruing liabilities for Social Security, pensions, Medicare, Medicaid. There are all kinds of promises we make to our people. Well, when we say to these people, we're going to provide you with these benefits, but don't put that Money aside. It's an unfunded liability that here in the US more than $200 trillion. So we're looking at total liabilities of the government in excess of a quarter of a quadrillion dollars. Now if that seems like a lot of money. It is. More money. It is more value than exists on the planet. This is not an amount that can be paid. But going back to the inflation issue, when the government overspends by 2 or $3 trillion, that gets added to debt and increases the money supply. Well, if you have more money chasing the same number of things, there's only one thing that can adjust, and that's the price, the price index. And so that's what we're seeing. And that's why the original and proper definition of inflation is an increase in the Money supply. Because if you increase the Money supply faster, you increase the supply of goods and services. Prices are the thing that we'll adjust. And that's exactly what we're seeing.

Phil: And it's also the debasement of the value of the currency as well, isn't it?

Gary Brode: It is. And that's why when people, uh, talk about inflation as an increase in prices, I understand we're going to have a very hard time getting people to go back to the definition of an increase in the Money supply. So what I do is I encourage them to think about it in terms of debasement, which means the purchasing power of your dollars decreases. And so to a large extent, what we were told as kids was wrong. Well meaning, but wrong. They said, spend less than what you make and save the difference. Put the money in the bank, but you cannot save in dollars, you can't save in fiat. Uh, fiat is just a fancy word for any government sponsored currency, right? The Japanese, uh, yen, the euro, the British pound, the US Dollar, the Peruvian Seoul. These are all fiat currencies just backed by promises made by the government. And that currency supply can be increased at no cost, at any time. And so that's largely what we're seeing. And so when we talk about monetary debasement, it's just a way of saying to people like, think about it this way, Phil. Imagine you have $1,000 in your savings account. Uh, you could take $1,000 today and you could go buy a certain amount of goods and services. So now think about that same thousand dollars a year from now, or three years from now, or five or ten years from now. How much will you be able to buy in goods and services then? More or less? The answer is, of course, less. And so you can't save in fiat, you can't save in dollars.

Phil: And of course, the other part of the blame game, which we haven't mentioned, is that everyone then goes and points a finger, uh, at the central bank, the Federal Reserve or the Reserve bank here in Australia, don't they, they do.

Gary Brode: And a lot of that blame is valid. Now, that's not really what's happening right now. But let's talk about the mistakes of the U.S. federal Reserve. First of all, the Federal Reserve should not exist. We do not need a government agency full of unelected bureaucrats and modern monetary theory and Keynesian, uh, economists to set the most important number in finance. And that's the rate of interest. And I'm going to redefine that. Your risk free rate, your interest rate is really the price of risk and time. We don't need government bureaucrats to do that. And the reason the Federal Reserve exists is so that the government can control the issuance of Money, so they can control the size of the Money supply, so they can debase the currency. And one of the things that we should talk about here is when they do that. So we, the example we just gave is you've got $1,000 in your savings account and a couple of years from now you want to spend that, and we agree you're going to be able to receive a smaller amount, less value of goods and services in a few years. Where does that value go? Where did it go? Did thieves sneak into your bank and steal it? Did hackers? Did Vladimir Putin and the boogeyman sneak into your Australian bank and take the value of your money? No. Now the value is being stolen by your government, and the value is being stolen by our government. And the Federal Reserve aids in that. People like the idea of inflation. You shouldn't.

00:20:00

Gary Brode: The value of the spending power of your money is decreasing every year and it is being stolen by the government. The term for it is seniorage. That's what seniorage is. Because it costs the government nothing to issue new currency. Right. Again, it's not like they have to mint gold and they're giving out something of value.

Phil: Are you confused about how to invest? Life Sherpa can ease the burden of having to decide for yourself. Head to lifeera.com.au to find out more. Life Sherpa, uh, Australia's most affordable online financial advice. But speaking of minting coins, I mean, that's where debasement first came about. Because kings would, you know, issue gold coins and over time, more of that gold coin would be silver or copper. And that was the original view of debasement. And I think it's really worthwhile to consider how our, uh, money is debased in very much the same way.

Gary Brode: So, Phil, not only are you right, that's been going on for thousands of years. And One of my favorite graphs and urge.

Phil: There just seems to be an urge for our, uh, ruling class to do that.

Gary Brode: Of course, it's a way to steal. It's very appealing. And so one of my favorite graphs is if you take a graph of the loss of precious metals in Roman currency about 2,000 years ago and you can see that's exactly what you said. The silver gave way to bronze and more and eventually it was a lot of bronze with just uh, a silver coding on it and it went down to zero. If you take that graph and then overlay it against the loss of purchasing power of the US dollar since the start of the Federal Reserve a little over 100 years ago, guess what? They look identical. The US is debasing its currency at uh, almost exactly the same rate that The Romans did 2,000 years ago. This is a dance that is, is thousands of years old and they can't resist. And here's an even weirder point of currency. Now, I don't know, I haven't seen Australian coins, but here in the US some of our coins have ridges on the side. Dimes and quarters have ridges. Do you know the reason for that? It is actually to prevent shaving. So what people used to do with smooth sided coins is they would take like sandpaper or a file and they would scrape the edges and sand off, you know, just that outer layer. And you know, if you shaved off 2, 3%, people didn't really notice. Like if somebody gave you an Australian coin that was 2% smaller and lighter than a normal one, would you catch it? I wouldn't, I don't know.

Phil: Is that diy, uh, debasement?

Gary Brode: Exactly. Yeah. And you know, then they'd melt it down, they'd make other coins. So what the minter started to do is they started to add those ridges along the outside, making it impossible to shave the currency without it being noticed.

Phil: You do cover in your ebook Misleading Economic Data and I'm interested to find out how this plays into the story of inflation and the narrative that's being constructed.

Gary Brode: Yeah, that's a great question. And the data that we receive has gotten so bad that I've actually just started openly using the word lies. More than that, I used to do a lot of analysis the government data that we got because it was considered to be reliable and would give us a pretty good idea of what was going on with the economy. I no longer use it. I don't do the analysis anymore because the numbers are fake. They're just so clearly not real. And that's happened with a lot of people. There are a lot of us who are just saying, yeah, that the numbers are out, we'll wait for the revisions and we don't care. I think the example I gave you before, and we talked about this earlier, we have a Potemkin economy and it's a reference to Russian village where they didn't build the whole town, they just built really nice fronts. But if you looked around, if you look behind, there was nothing there. Here in the US we have an economy that is just a veneer. There's nothing real behind it. And so just to give you a couple of examples, the most important number that the government prints is the GDP number, gross domestic product. It is supposed to be a measure of total goods and services produced in your economy. Now, anybody can point out that's very difficult to do and your methodology is going to be inaccurate. And some of these things are just impossible to figure out. And so I understand you can't get an exact number and there are probably better ways to do it, but it's impossible to get an exact calculation of it. But the numbers that we would get were supposedly pretty good. But in recent quarters, the increase in

00:25:00

Gary Brode: government debt in overspending has been greater than the increase in gdp. And so government spending gets added to gdp, whether it creates value or destroys value. But what we can see is that here in the US we've got economic growth in the 2, 3% range, which is. That's decent. That's not bad. People think China is fantastic for like 5% growth. A more mature economy doing 3%, that is a totally fine number. But if you do the math and you back out government spending, what you find is that the productive private economy, where people are really making things that people want at, is declining. And so what we have is wasteful government spending making it seem like we have economic growth while the real economy is declining. And you know, again, Congress here, they act like there's no cost to that. Well, we're all paying for it, right? We're paying for our stimies, we're paying for our benefits. We're paying for financial support and transfer payments. And what we're paying for all of that through inflation because the treasury monetizes it and the Fed makes it all possible. We see in accurate data in the cpi, the way we account for housing costs is notoriously inaccurate and intentionally so. That's about one third of the CPI and the calculation we have, instead of going for actual housing costs, we use something oer it stands for owner's equivalent rent. They go to people who don't rent their homes out and they say, well, if you were to rent your home out as a service, how much money would you get? You like, I don't know, I haven't tried to rent my home. Nobody in my neighborhood is rented in 20 years. And so you end up with an OER, an owner's equivalent rent figure that trails actuallying actual housing costs by a huge amount. These things are not accurate. Food costs. The government keeps telling us that food inflation is 1 to 2%. Phil, do you believe that? I don't. I think anyone who thinks food inflation is 1% hasn't been in a supermarket in years. The employment data is so inaccurate that what we get are very positive initial reports on the day that everybody's looking at it. And then a couple months later they revise the numbers. Guess which direction that revised them down? Here in the US alone we had earlier this year not one but two separate revisions in the neighborhood of 3/4 of a million jobs. They're overco counting by millions of jobs. Making things even worse, some of the data is accurate but m misleading. And you think, wait, how is that possible? How can we have accurate data that's misleading? Well, when they count the jobs, they're counting number of jobs. So the number of full time jobs here in the US has been flat to down for years. Number of full time jobs held by native born Americans declining. There's been no growth in that for years. So where's all the job growth coming from? Part time jobs. We don't have more people working. We have the same number of people working more jobs to make ends meet. And they're telling us that this is a great economy. There's no part of this that's accurate or honest or designed to provide analysis that allows us to one as a financial analyst to analyze the state of the economy. But more importantly, the government is obfuscating the state of the economy. And so they're spending and making plans based on projections where their inputs are complete nonsense. They're saying, hey, the economy's in great shape. Um, but if it's not, then your spending plans are not going to be matched by the taxes that you take in. And that's part of what we see.

Phil: And Gary, look, really the solution to all of this is to tax the rich more, isn't it?

Gary Brode: Yeah, that's always know where we go.

Phil: That old story.

Gary Brode: Yeah. You know, if you take a look, we have an extremely progressive tax regime here in the US the top 1% pay something like one third of our taxes. The top 10% pay something like 80% of our taxes.

Phil: So progressive. Just to, uh, define that term, progressive means that the more you earn, the more you're going to pay in taxes. I actually have heard one commentator say, maybe they should text the poor more to make them try harder.

Gary Brode: Well, here's the issue. The issue isn't that we should make life more difficult.

Phil: That's a joke, by the way. Listening.

Gary Brode: No, I get that. But let's actually address it. Like, let's take this seriously. Here in the US a little over 50% of the country pays no income taxes. Now, they do pay other taxes, but they're not paying into the system. And the issue with that is they don't bear the burden of their decisions. And so it's very easy for them to say, well, wait a minute, we don't pay taxes. Let's vote ourselves a bigger share of what other people are doing.

00:30:00

Gary Brode: And that kind of populism seems really appealing until your high earners say, I don't really need to work that hard if you're going to tax me that much. Or we're starting to see very, very wealthy people leave their countries of birth, their countries of origin, and say, you know what? I'm going to take my business and my life and my assets to places where capital will be treated better. And we're starting to see that. But having a situation where people can vote for more of what other people have at no cost to themselves doesn't lead anywhere good. It's not that we should be making life difficult for people. It's that people should feel some consequences to saying, we need a bigger government. Regardless of all that, the language that's always used is people say, well, the rich should just pay their fair share. By the way, Phil, I have been hearing people talk about fair share for at least 40 years here in the U.S. the beauty of using a term like fair share is one. What reasonable person could be against that? Phil, are you against being fair? Uh, do you want to come out in publicderful against fair? Right. It's sort of this language that forces people to agree because it sounds so reasonable, but it's also not definite. It's an indefinite word. How much is the fair share? And the answer is more, Always more. I would love for us to have a discussion where we define what fair share is, and then that's the definition. But the answer to fair share is always, always more. And it's a way of, uh, hiding the problem, making all of this worse. Even if we take the billionaires and the multi billionaires and we just tax them at 100%, it's not enough. It won't pay off the debt, and it certainly won't get as close to the quarter of a quadrillion dollars that we owe. And remember something, the problem with stealing from people is you can only do it once. Once you take all of their assets, then they no longer control those productive assets. And you say, okay, well, we'll just tax their income a lot. Even if you want to assume that people will work as hard and be as productive, when they don't get to keep the benefits of that and say, you know what? It's my duty to work for everybody else. Do the math on it. They don't have enough money to pay for our debts. And so one of the things I see is Congress always says, okay, we're going to increase taxes, but don't worry, it's only on the super wealthy. Those millionaires, those billionaires, the guy worth 100 billionaire, uh, they can afford it. And everyone says, yeah, well, great, let's tax them. They can afford it. Well, guess what? That's not where the money is. The money is with the middle class because they have less per person, but there are a lot more of them. And so I see these people saying, well, this is great. They'll te taxxt the other guys. Well, no, they're not aiming at them. And by the way, those guys have better accountants than you do. And they have offshore tax plans and ways to hide assets. Those taxes always end up back on the middle class. And we saw that the amt, the alternative minimum tax, was actually instituted the United states in the 1960s to get fewer than two dozen ultra wealthy families, they literally instituted a tax going after the billionaires. Right? Just the two dozen wealthiest families in the country. Well, guess what happened a few decades later, mission creep set in. And I've been clipped by the AMT before. I've had to pay that before. I assure you. Uh, I'm not a billionaire. It's sad. Somehow I have to live within my means.

Phil: But you don't have to admit to being a failure here on this podcast. It's okay. We accept you for who you are.

Gary Brode: Exactly. Yeah, it's embarrassing that I'm not a billionaire. But these AMT taxes now hit millions and millions of American families. There's always mission creep. The answer is more, always more. And the fact is, Congress has no intention of ever living within their means. Even if they collected more in taxes. Okay, Phil, here's your political quiz for the day. If Congress collected more in taxes, would they say, okay, good, we're going to be responsible with this and pay down the debt and reduce our interest expense and not leave our kids and grandkids, you know, a ridiculous amount of debt, or are they going to spend that and then say, well, we need you to pay your fair share and then ask for more? The ratchet only goes in one direction.

Phil: That's right. They're going to spend more and they're going to tell you about why it's helping you to get your vote at the next election. Basically, it's all, I mean, that's what the incentive is, isn't it always?

Gary Brode: Yeah. And they act like there's no cost to it. And I think you and I have talked about this before. Here in the US During COVID the government send out these stimulus checks. They send out $800 checks to people. They send out $1,600 checks, and everyone's like, wow, this is great free money. Is it really free? So you get the $1,600 check, but your monthly

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Gary Brode: expenses go up by 100 or $200 a month. Well, guess what? You're paying for your stimies. You're paying for that. And then what happens the following year? The government doesn't send you that check? Well, prices haven't come down, so you get a permanently higher price index as a result of getting these stimmies getting these benefits from the government. They act like there's no cost, but there is. And so as a result, we have a government that is lying to us and they're acting like they're being fiscally responsible and that we can afford all of this and there's really no cost. And so we have guns and butter and bread and circuses and everybody gets everything they want. You know, compromise used to mean that I'll get some of what I want and cut some of what I want. You get some of what you want, you'll cut some of what you want and we come to some reasonable arrangement. Now, compromise means I get everything I want and you get everything you want. I won't block your spending plans. You don't block my spending plans. The ratchet only goes one direction. We just spend more and more and more and we pretend that there's no cost to it. But when you increase the money supply without creating more goods and services, the only thing that adjusts is price. We keep coming back to it. But this is how they steal.

Phil: Ok? So we're an investment podcast now. We could react to all of this information in many ways. We could calll up in the fetal position. We could become survivalists and store lots of ammo and tin goods. But we want to use this information to make better investment decisions. What are you thinking at the moment?

Gary Brode: I think a few things know. First of all, this is not going to stop. It should. I'd like it to. We're not going to get our way. So it's exactly what you said. We can curl up and cry and bitch and moan about it and be upset. Uh, I don't want to spend my days like that. Right. And the beauty of being an investor is we can still take advantage of bad policy, bad decisions, bad markets, bad outcomes. There are things that we can do. So the number one thing that I think about doing when I look at a continuing inflationary environment is the own hard assets. Owning things like real estate where you can leverage, you can basically short the dollar and borrow in fiat and own hard assets. That's a great thing to do. Although I wouldn't want to own commercial real estate or office real estate right now. But that's a different story. But, you know, if you owned your own home and refinanced your mortgage in 2021, which was, you know, something I did, that's worked out really well. Gold Bitcoin, you know, we've been huge. We've had huge positions in bitcoin for years. We were buying it at 15,000 and then when it dipped back below, when it was back at 15,000, we were buying the grayscale Bitcoin trust at, uh, a 25, 30% discount to that. We were basically buying bitcoin at around 11, $12,000. So that's worked out really well. And I don't hesitate to own it here. It's my largest position. I have not sold into this run out. If it goes back down, that's fine. I'll own it for longer because inflation is going to continue. I like to think about energy positions. The world will always want and need more energy. That ratchet only goes in one direction. Half the world really wants to industrialize and live at a higher material standard of living. That means more energy, energy usage and material quality of life. I'm not talking about spiritual or family connections or the things that make life really enjoyable or worthwhile, but just from a material point of view that correlates with energy usage at about 100%. Right. That R squared is roughly one energy typically gets priced in US dollars well, uh, if you have declining dollars and increasing demand, I love owning oil producers, oil field services, pipelines, and I have a huge position in uranium. I think nuclear power is making a huge renaissance. Even Australia is starting to change its restrictive view on that here.

Phil: Good luck with that.

Gary Brode: Well, they're looking at it.

Phil: Uh, it is being looked at. Yeah.

Gary Brode: Yeah. And here in the US we are doing something that has never been done before. There are three nuclear plants that were decommissioned that they're looking at recommissioning them, putting them back in service. Three Mile island, there's one in Michigan, another one in the Midwest. I want to say it's in Iowa. I could be wrong on that last one.

Phil: Three Mile Island.

Gary Brode: No, but you know, guess what? They're putting it back together, so that's a way to do it. And then, uh, you. The core of what I do is finding undervalued high growth stocks where there's some sort of misperception, where the market has it wrong. And, you know, I'm finding some things right now that I really like where there's the possibility to make three, five, ten times your money over the next five years. And I want to be in positions like that. So there are lots of things that can be done. And so, you know, people are very focused on the Federal Reserve, but the Fed isn't in the driver's seat anymore. They've really been sidelined.

Phil: So you don't believe the Fed has any, uh, say in this or can do anything? They've got nothing to offer us.

Gary Brode: So that, that's overstating it a little bit. It's not nothing. But here's the situation with the Federal Reserve. First of all, they kept the Fed funds rate far too low for far too long. They blew up their balance sheet to $9 trillion. A lot of the inflation that we're experiencing now is absolutely falls on the shoulders of the Federal Reserve. The problem is that right now it's Congress that's overspending in the Treasury Department that's monetizing. So here's what happens. Let's say you're the Federal Reserve and you're doing, you know, what they're doing right now, which is lowering interest rates. Well, when you do that, you end up, uh, spiking the economy and creating more inflation.

Phil: A sugar hit.

Gary Brode: Yeah, yeah, exactly. Okay. That's the direction we're going now. Now somebody could say, well, wait a minute, you know, so you think, you know, we should have higher rates. And I do, but let's talk that one through when the Fed raises rates, what we end up with, what we just saw was borrowing cost in the US Our interest expense just a few years ago was something like $600 billion. Right now it's north of $1 trillion. Uh, next year, I think we're looking at roughly one and a half trillion dollars. That's a really big increase. Well, Phil, given that our government has annual deficits, how do we pay that trillion, trillion and half dollars of interest expense? There's only one way. We print Money. We monetize it. We increase the Money supply. What is that do that creates inflation. So everybody's looking at the Federal Reserve, but, uh, it's really Congress that is in charge right now. You know, I wrote an e book a year ago called Counterintuitive Inflation where we basically said the Fed is stuck right now. Whether they lower or raise, we're going to have more inflation. And higher rates don't mean a reduction in inflation. It's really Congress that needs to reduce this. Somebody who I respect an enormous amount, Lynn Alden, I think does phenomenal work. She's referred to this as fiscal dominance, and she's been writing about that for a long time. I think her work on the matter, and I agree with her conclusions. You know, we called it counterintuitive inflation, she called it fiscal dominance. But I like her conclusions on this as well. Her meme is nothing stops this train, which is basically saying, doesn't matter what the Fed does, as long as Congress overspends, this is the direction we're heading. And so you asked this question when we were talking earlier. If all this happens, where does that leave the Fed? Are they sidelined? Yeah, they're on the team. But here's how I think about it. Phil, do you follow American football at all? You know the sport?

Phil: No. The sport, but no, don't follow it at all. We watch the super bowl for the halftime show every year because it's on exactly at midday here in Australia.

Gary Brode: Fair enough. All right, well, so here's the analogy. Imagine you're down by seven points. You have a minute left in the game. You need to drive the length of the field, score touchdown to score seven points to tie it up and send the game into overtime. The Federal Reserve is the field goal kicker. Field goal worth three points. Field goal kicker is in the stadium. He might be kicking the ball on the sideline, but putting him on the field doesn't change anything. It doesn't change the outcome. That's my clever analogy for what do.

Phil: You think that's Pretty good Ye, but I can understand that. I'm sure there's an Australian football analogy as well.

Gary Brode: Yeah, I like the guys with the white flags and the very definitive O.

Phil: Uh, that's afl. That's a, um, different sport.

Gary Brode: Wait, is that not Australian football?

Phil: No, it is. Yeaheah, it is Australian football, but there's also rugby league, which M you mightn't be aware of, but Russell Crowe is trying to promote it in the United States. So I think he's been playing some or he's been putting on some show games in Las Vegas to try and get the US Interested in. I think it's going to be, uh, pretty hard.

Gary Brode: It sounds like, uh, a tough sal.

Phil: Is a tough sell. Yeah, yeah. Far more physical. It like it is a little bit like NFL but without the helmets and the shoulder pads.

Gary Brode: Got it. All right, well right now the Fed is your field goal kicker on the sidelines. Can they affect the score? Yeah. But not the outcome.

Phil: Yeah. So I'm glad we got to the Fed role versus Congress's role because viewers and listeners might not be aware, but we're sharing a document and I could see, I jumped a question and I could see Gary's cursor moving furiously around the screen. So I'm glad we went there. So let's talk about Deep Knowledge Investing. How can listeners find out a bit more? And um, you've already told us what you've got to offer and yeah, it is a pretty good offering. And the ebook, will that we be able to make the ebook available for viewers and listeners?

Gary Brode: Yes. So taking your questions in reverse order, the ebook, we will be releasing it next week. If people go to my Twitter or ex account, it's Gary Broad, B R O D E. Sometime next week, you'll see I'll make it the pinned post and people will be able to just

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Gary Brode: click type in a word and we'll send them a link to download the ebook. So we'll have that. I'm hoping Monday or Tuesday. We're putting the finishing touches on it for people who are interested in what we're doing. While I do love talking about the economy with you, my real job is helping Deep Knowledge Investing subscribers make Money. We work with hedge funds, family offices, registered investment advisors and individuals, including individuals like your listeners. And we help them get better returns in the stock market through we've got our own portfolio, a limited number of high return stock picks, alternatives, hedging options. So there's a lot that we do to help people get better returns in the stock market. And you know, if people want to check it out, they're welcome to. We do have a free subscription option if people want to see the kinds of stuff that we're writing. But, uh, the things that we do to make money were not releasing in public because I want my paying subscribers to get value for their money.

Phil: And at this point I'd also like to highly recommend your ex Twitter feed. You're posting all the time and it's a lot of great information and a lot of very good other investors that you're talking with as well.

Gary Brode: Thank you. I appreciate it. It'you know, it's a fun community on there. I know. You know, there's been a lot of talk. People have been complaining about the quality of discourse on there. That's not what I find in the Fin twit or the Fin community, the finance people, even the arguments tend to be really smart people discussing and debating opinions. And you know, there's a lot of, hey, I don't understand your point. Why do you think this? Can you explain? And people do. And there are a lot of, you know, really, really good investors and economists and analysts who just share their information and you know, I try to be one of them, but the peer group there is outstanding and the quality.

Phil: It is. It is, isn't.

Gary Brode: Ition is great. Yeah, yeah.

Phil: We've got a couple of economists here in Australia. Warren Hulk Hogan vs. Stephen the Kook coculis. And their debates, uh, are great in the way that the posters on X will take their arguments and say, well, what about this? And talk to Hulk versus Kook debates.

Gary Brode: Yeah. And I think it's great. You know, I make my choice whether to engage or not. To me, there are three levels. So, you know, there are people who attack me personally because, I don't know, they're just socially maladjusted or just. They tend to be people with small accounts who want attention. They figure if they get somebody with a larger account to respond, it'll get them views. And I just block those people because life's too short to deal with abusive idiots. Then there are the people who just say, you're wrong. Okay, you know, I don't know what to do with that. You know, you can disagree, you can tell me I'm wrong, but I don'I don't engaged when people ask me a question or they say, I think you're wrong because and they make their point, then we can have a discussion and we'll go back and discuss and debate and find the points where we agree and the points where we disagree and there's no obligation to adopt someone else's point of view, but at least by the end of it you understand it. And there are people I follow on there who I like and respect because they do great work, but I also disagree with them. And some of the people that I chat with on X, there are people I disagree with on a regular basis. I don't agree with their conclusions, but their work is fantastic. They explain it well. I ask them questions, always politely. They give me polite responses. And it's good to have discussion and debate and an exchange of ideas with people who see the world differently than you. And it can be done in a really good, healthy way. And so it's something that I enjoy and try to be part of on a daily basis.

Phil: Do you have any optimism to do with the newly announced doge, the Department of Government expenditure with Elon and Vivek?

Gary Brode: So I have some mixed feelings on that. First of all, it's a great idea with great people doing it. It would be very hard to dispute the amount of intellectual horsepower in a room with Elon and Vivek. They're two really smart guys. I also think putting two libertarians who want the government to be smaller and who are taking aim at ridiculous and wasteful spending. Like, uh, just to give you an example, a couple of years ago the United States spent millions of dollars training Chinese prostitutes to drink more responsibly while on the job. Why? Why are we doing this? We spent tens of millions of dollars to improve name recognition for the Kennedy family and the state of Massachusetts. Why? They're the most famous family in the state. Ah, why are we doing any of this? And the examples just get dumber and dumber and more ridiculous. In fact, the thing that was being passed around on X yesterday was apparently the US government spent millions of dollars to study whether quails have more sex when they're on cocaine. Why we need this information, I don't know. So I think there's a lot of ridiculous spending

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Gary Brode: that could be cut and should be cut. And putting a couple of really smart people who are looking for just this low hanging fruit in charge of it to me makes a lot of sense and I think it's a great idea and I'm very much in favor of it. Where I have mixed feelings is I think their ability to succeed in a large way is going to be limited. They do not have official government power. They basically have an office where they can advise the President. Now, does Elon Musk have The ear of President Trump, you better believe he does. Those two talk on a regular basis. And if I were President Trump, I'd be listening to the guy who funded a very successful reele electionion campaign. But, uh, they don't have authority. They can make recommendations to the President. The President will listen to them. But it's very difficult to cut spending, and that's for two reasons. One, the President doesn't have control of a lot of spending. Most of that goes through Congress. And if Congress votes to spend money on stupid things, right. If they decide they're going to build a billion dollar slingshot to try to shoot gum onto the moon, which is, uh, like was the most silly thing I could think of on short notice. And Congress votes to authorize spending for that, it's very difficult to go back later and say, no, you're not going to like. The money is authorized. Congress has the power of the purse. If they authorize spending. It's very difficult for somebody who advises the president, but who doesn't have authority to say to Congress, no, we're cutting the spending. You gave, uh, a spending authorization to this government agency. We're closing the agency. That's very difficult to do. The other thing is, even when you come up with stupid spending, people are against cutting it. And here's why. Everybody is in favor of cutting wasteful spending unless it's in their district. Well, we have 535 members of Congress, 100 senators, 435 members in the House. So 435 House districts, Phil, I guarantee you all 435 districts have wasteful spending. And everybody's view is we should cut the other guys wasteful spending. But I like the stupid spending in my district. And so again, we're at a point where compromise means, okay, we're going toa spend money on the dumb things I want. You can spend money of the dumb things you want. See, we've compromised. And so beyond all of that, they're talking about cutting $2 trillion. The discretionary part of the budget is $1.7 trillion. The rest of it is things like interest the military. That's not going to be cut. Not a chance. And the biggest part are transfer payments, things like Social Security, Medicare, Medicaid, welfare, food stamps, Section eight House.

Phil: Yeah, good luck. Yeah, good luck trying to cut any of that.

Gary Brode: Right, yeah. Uh, it's not like theve Vek and Elon have the option to say we want to cut Social Security spending. By the way, Florida, which has been reliably read the last few elections, we've just given that up. Nobody's doing that. It's not an option. And so I think it's a great idea with great people involved. I think they've got the right people involved. I think it's something that should be done. I'm just cautious on how much impact they're going to have. And by the way, Phil, I want to be wrong. I hope I'm wrong. I hope a year from now you invite me back on this show. And topic number one is, Gary, let's talk about all the reasons you were wrong about this. I would love, I would love to eat crow on your show and talk about how I got this one wrong. I don't think I did, but I'm hoping, I'm hoping to be wrong.

Phil: Okay. Well, it's always good to get you back on the program to admit any wrongness. Yes. Gary Broadd, thank you very much for joining me today.

Gary Brode: Thanks for having me, Phil. Always great speaking with you.

Phil: Thanks for listening to Shares for Beginners. You can find more@chesforbeginners.ct if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

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