Inflation, Bank Failures, Bubbles and Other Lessons from Financial History with Mark Higgins

[00:00:00] I went into this kind of pessimistic about the United States, but then I found out after

[00:00:06] reading newspaper, 100 years ago, 150, 200 years ago, there's always every generation

[00:00:12] thing so last one that the world's going to hell and this is it.

[00:00:19] To be honest with you, I think there are a lot of situations in US history where there

[00:00:24] is a better argument. I mean, living in 1941-1942, it did look like the world was coming to

[00:00:30] an end. Living in the 1840s, it was the disaster. So it just kind of taught me that things

[00:00:40] happen worse in this country significantly worse and we get through it. And I think some

[00:00:46] of the enduring values that we have in the United States will enable us to get through

[00:00:53] the next crisis and that is hard work. And being a people that likes to improve things,

[00:01:00] there was everybody like that, no, but I think we have enough people that believe in fixing

[00:01:06] things, making the world a better place, innovating, and I don't think that's fear

[00:01:12] it has died in the United States.

[00:01:14] Welcome to Excess Returns where we focus on what works over the long term in the markets.

[00:01:19] Join us as we talk about the strategies and tactics that can help you become a better

[00:01:22] long term investor.

[00:01:23] The opinions expressed in this podcast do not necessarily reflect the opinions of a

[00:01:28] league capital. No information on this podcast should be construed as investment advice.

[00:01:31] Securities discussed in the podcast may be holdings of clients from a league capital.

[00:01:34] Hey guys, this is Justin. In this episode of Excess Returns, Jack and I talk with Mark

[00:01:37] Higgins, financial historian and senior investment advisor at index fund advisors.

[00:01:41] Mark is the author of a new book, investing in US financial history, and in this discussion

[00:01:45] we walk through our country's major financial developments over time. As Mark points out, history

[00:01:49] never exactly repeats itself, but there are usually corollaries we can look back to and

[00:01:54] learn from the financial history that can help guide our decisions today. From COVID to

[00:01:57] the great financial crisis to wars, peers of inflation, monetary and fiscal stimulus,

[00:02:02] history offers clues to how the markets and investors may react. You can learn more about

[00:02:05] Mark in his book at lightenedinvestor.com. As always, thank you for listening. Please

[00:02:10] enjoy this discussion with Mark Higgins, author of investing in US financial history.

[00:02:14] Mark, thank you very much for joining us today.

[00:02:17] Thank you for having me, Justin and Jack. I'm excited to the discussion.

[00:02:22] Yeah, I think it's going to be very interesting on a lot of levels. We're going to use your

[00:02:29] new book, which is titled, Investing in US Financial History, Understand the Past,

[00:02:34] the Forecast, the Future. I think to see what investors of all different levels can learn

[00:02:39] from studying our country's financial history, the things maybe we got right, some of the

[00:02:45] things maybe we got wrong. Then probably most importantly, how history can be relevant

[00:02:51] to many different times in the markets and our economy and how understanding that history

[00:02:58] can help I think in making long-term good actual decisions when it comes to investing

[00:03:05] in just understanding the market. That's going to be the core of the discussion today.

[00:03:13] I would definitely highly encourage, and I was fortunate enough to get an electronic copy

[00:03:18] of the book which appreciate you sending that over. But people that are interested in this

[00:03:21] discussion go check out the book. It's obviously on Amazon and major book websites.

[00:03:27] Mark has a website www.enlightenedinvestor.com and just want to mention that stuff right

[00:03:33] up front so that people know where to go to learn more about you.

[00:03:36] Great, thank you. You're very welcome.

[00:03:39] Let's start, you kind of started the beginning of the book with the story around

[00:03:44] COVID and what brought you into this project. So I thought we could start there because

[00:03:50] I think that in itself is just interesting to me.

[00:03:55] COVID-19 when it hit February March 2020, it caught everybody off guard.

[00:04:02] I mean, it was like, it's referred to as a sudden stop panic by the angel panic. But we really

[00:04:09] hadn't experienced one of those for a long time. And I was advising at the time, I was

[00:04:13] serving as an investment, it's all advising endowments, large endowments and pension plans.

[00:04:19] And to be honest, we got a little flat-cloded in terms of how to advise them to react.

[00:04:23] It just seemed like it was something that never occurred before.

[00:04:26] And once I had some more time on my hands because we were in quarantine,

[00:04:30] I started just reading financial history to see if there was some precedent for this.

[00:04:35] And the more I read, the more books I read, I'd call them like 10 or 15 books at that point.

[00:04:41] After a few months, I realized that using financial history and stories that were similar to what

[00:04:46] we were experiencing in the present was a lot more helpful than just, you know,

[00:04:50] basing your advice on your own life experience or what was kind of going on in market at the time.

[00:04:57] And I also noticed that I mean, I still can't believe it. That there was no book.

[00:05:01] There was no single book that recounted the full financial history of the United States.

[00:05:05] So I knew it was an ambitious endeavor but I saw a huge gap in terms of a resource

[00:05:13] both for academia and for investment professionals. And they spent about four years writing it.

[00:05:18] And that's how we got here.

[00:05:20] That is a pretty massive effort and a big list because I think the book is something like,

[00:05:25] 600 pages including all the references and index and things like that.

[00:05:31] I mean, four years and probably hundreds of hours would you say?

[00:05:40] We had done some discussion beforehand on some possible questions and just what the process

[00:05:45] was like, what you see behind me is evidence of what the process was like.

[00:05:49] I used to hide this because everyone people think I was crazy but the books or I've read all

[00:05:55] these books some of them multiple times. I don't know how many are there. I mean,

[00:05:59] it's a 70. I don't know but I probably read about that. I lost track of 200 books.

[00:06:05] Probably three times that in terms of journal articles, studies, newspapers.

[00:06:10] And the process really was starting in 1790 and working your work.

[00:06:17] I immersed myself in history as a buzzwitty. I mean, I would literally spend weekends reading

[00:06:22] newspapers on the couch from like the 1800s and my life is always big fun to me but I'm like,

[00:06:27] you know, I have to feel like I'm actually experiencing what it was like to live them.

[00:06:31] And what would usually happen is I'd kind of take kind of 30 or 40 year period.

[00:06:37] I have notes scattered on the wall mapping out what happened and then we just take a step back

[00:06:42] and say, okay, what really happened here? What is the theme and how is this important for people

[00:06:49] in the present to know. And then I would write a couple chapters and later on, I divided the

[00:06:55] sections but there are key themes. So they're about six sections of the book but that's how I did it.

[00:06:59] It was just, you know, people asked me, it was 85% I would say reading and notetaking and thinking

[00:07:07] and you know, probably 15% writing and that's why it's so hard to do a book like this is it's not,

[00:07:13] it's not just writing based on your knowledge. You have to consume so much and synthesize it

[00:07:20] and it was all encompassing. I mean, I felt like I felt like I was in the past when I finally finished

[00:07:26] I felt like I was coming in the past. It was actually a real feeling.

[00:07:30] You referenced looking at the past to try to examine some of the events we're dealing with today

[00:07:35] and that's what we're going to do with the interview. We're going to talk about a bunch of things

[00:07:37] that are going on today and we've had a lot of things going on that you can use the past for.

[00:07:40] We've had inflation, we had COVID, we've had banks, panics, we've had all kinds of stuff. So we're

[00:07:45] going to work through all those individually but first I wanted to talk about like how you think

[00:07:49] about using history for investors. You know, on one hand, we want to understand history,

[00:07:53] we want to understand what happened. On the other hand, we probably don't want to think that it's

[00:07:57] going to repeat itself exactly the way it did in the past. So how do you think about like as an

[00:08:01] investor, if we look back at different things, if we look at something that's going on right now,

[00:08:05] we want to relate it to history, what's the best way to do that? You know, it's there are people that

[00:08:14] adhere to the philosophy that things repeat exactly. They don't repeat it and COVID is actually a great

[00:08:19] example. What ends up happening is I feel like the best way to use the book and the way I've

[00:08:26] used the book and the research is certain events will happen, multi-year events. And you have to

[00:08:32] note different events from the past that give you the principles to understand how it's going to

[00:08:37] be dealt with. So COVID was a perfect example of the initial shock was not like 1918 and 1918. It

[00:08:43] was actually like July 1914 when the whole world literally within a month at peace went to total war

[00:08:50] in World War I and the shock was actually very similar to what we experienced in March 2020.

[00:08:55] Then after the worst of COVID subsided, you had the inflation kick in. That was a lot like the

[00:09:01] end of World War I and in 1920. I'm sorry, the end of World War I and the Great Influenza in 1919 to

[00:09:08] 1920 and understanding that helped understand, helped me, you know, kind of understand if this

[00:09:14] probably not going to be transmitted or I'm sorry, transitory. And then now here's the point where

[00:09:19] inflation has persisted for so long. The real risk is that we go back into in 1960s

[00:09:27] in 1970s, great inflation type of it. Now I don't, I definitely do not think that's going to happen

[00:09:31] but that's really the primary risk that the Fed is dealing with. So it's not that history repeats

[00:09:36] exactly but the more you know about events in the past and the key principles that still apply

[00:09:43] to the present, the better of the R.I. Do not subscribe to the philosophy of I think we had

[00:09:49] done some questions back and forth before this and there were some comments on the turning and

[00:09:54] kind of generational changes. I don't really believe in a lump cycles that repeat. I do believe in

[00:10:00] specific events that repeat and take different mutations. Yeah it's interesting like what you

[00:10:05] describe is really like a latticework type approach. You know, it's not like we find the exact

[00:10:09] event in history that matches what's going on. It's like we take this part and this part and

[00:10:13] we put it together and that really like requires a huge understanding of history to be able to do

[00:10:18] that because you need all those pieces that put together in the puzzle. Yeah and you know,

[00:10:22] things start popping up like you know a good example of the Silicon Valley background where

[00:10:26] that was if you understood how how big runs work, you know it was immediately clear that that

[00:10:35] was the major threat to the system and the Fed was going to do one of those weekend meetings.

[00:10:39] I'm on record you know writing this, they're going to do one of those weekend meetings. They're

[00:10:43] going to they're going to step in aggressively and they're going to stop it because an uncontrolled

[00:10:48] bank run that has that is based on a systemic flaw which this one was you know a lot of most

[00:10:53] of the depositors were not covered by the FDS because they were about the 250,000 out of limit.

[00:10:59] That is a very real risk that can spiral on a control right away and understanding what the

[00:11:04] bank runs look like in the seven with it looked like in 1921, 29 and then early 90s,

[00:11:09] 30s. It was very clear what the Fed was going to do. They have no choice.

[00:11:14] It's interesting you know one of the things I find myself doing all the time you reference

[00:11:17] Silicon Valley bank which we'll talk about a little bit more later but this idea that whenever

[00:11:20] I see something going on I always go to like the most immediate thing in history that seems similar

[00:11:25] and I'm like that's what's going to happen and you see that all the time like with Silicon Valley

[00:11:29] back you saw it's bank you saw with 2008 everybody's like oh here's Silicon Valley bank happening

[00:11:33] we've got a financial crisis on our hands we go to 2008 but that ends up being the totally the

[00:11:37] wrong way to look at it but it's just the way I guess our reasons he bias works is we've got

[00:11:41] that most recent event in our memory so we go there first. This was like nipping a yeah well

[00:11:46] it was a nice relatively isolated event into turning into a systemic event but it was not the GFC

[00:11:53] and I don't know if you got to the I know you have an advanced copy of the book but when you read

[00:11:58] about the global financial prices which I the chapters from all the great shadow bank run

[00:12:03] you that's really what it was. That's very different than what we saw Silicon Valley bank.

[00:12:09] Going back to COVID I mean you talked about it briefly but that was one of the things that

[00:12:12] I found really interesting in the book is you really got into detail of the great influenza

[00:12:17] and kind of what that happened and then you know what happened with it and then what it led to

[00:12:20] after that can you just talk a little bit about that experience of the past and sort of how it relates

[00:12:24] to what we see now with COVID. You know the the inflation that came after World War One I would

[00:12:29] say honestly it was more a function of World War One that was the great influenza but the great

[00:12:34] influenza did contribute to it and by the way just kind of a fun fact. The reason why I refer to

[00:12:39] it as the great influenza is because the Spended Flu was really a misdomer. It actually

[00:12:46] that it's almost certain that the flu originated in Kansas in March 1918. It was called the Spended

[00:12:51] Flu because all the belligerents in World War One had these draconian censorship rules so you

[00:12:56] couldn't talk about anything that could threaten morale. Pandemic flu that was killing everybody

[00:13:01] was thought to threaten morale so nobody could talk about except for Spain which was which is a

[00:13:06] neutral country so that's what it called its Spanish flu because everyone saw it in the Spanish

[00:13:09] least fit first but anyway after World War One and the great influenza the second wave of the

[00:13:15] Great influenza was the most deadly in the fall of 1918 and after that subsided and after the

[00:13:21] armistice in World War One was signed in November 1918 you had a similar situation to the

[00:13:31] end of COVID. It wasn't really the end of COVID but as the worst of COVID subsided in the spring of 2021

[00:13:38] and you had a lot of things that were fuel for inflation, you had

[00:13:42] you had massive stimulus. Now in the case of the post-World War One period it was two things,

[00:13:51] there was a lot of exports and gold inflows because you have this one thing reconstruction but it

[00:13:57] was also a lot of pent up tomato and people during World War One people were spending a lot

[00:14:01] there of rationing and then you coupled that with the Great influenza and you know also you had

[00:14:05] a lot of pent up savings that got unleashed so a very similar thing happened in the spring of 2020

[00:14:11] 2021 you have the worst of COVID subsided. You had a ton of cash on the sidelines because people

[00:14:18] didn't really spend it during the worst of COVID and it got unleashed so it was a very similar

[00:14:25] dynamic and this is the kind of thing where if you immerse yourself in history it's kind of like

[00:14:31] instantly recognizable. Now I happen to be studying, I happen to be reading about that when

[00:14:36] the inflation started freaking out but these things are instantly recognizable the more you

[00:14:42] immerse yourself in it. Yeah and going back to your reason you wrote a book like you kind of

[00:14:45] had that experience where you said I don't have enough knowledge of history, that's the same

[00:14:48] situation I find myself in, then and probably now as well as like you said to be able to instantly

[00:14:53] sort of recall all this stuff and put it together you've really got to have that deep knowledge of

[00:14:57] history. If you have a little bit of knowledge about what might have happened here and here it's

[00:15:01] not enough to understand and I got a lot of that wrong in terms of I didn't see anything coming

[00:15:06] you know with inflation falling COVID probably because again I didn't have enough of a knowledge of

[00:15:09] history. Yeah I mean nobody, I mean even the Fed you know you don't see them referencing world

[00:15:14] I'm still surprised they don't you don't see them referencing world war one but this was I mean

[00:15:18] not only was it similar duration although this one's a little longer the causes were very similar

[00:15:25] you know it was it was pent up savings that got unleashed, you had massive fiscal monitors to

[00:15:30] me also now it was some for different reasons to subject that during someone more similar but in

[00:15:36] 1918 and 1919 the Fed reacted the same way they raised interest rates in January of 1920 by 125

[00:15:44] basis points and then another hundred basis points in June 1920 and the economy went off the

[00:15:50] cliff. Now I don't you know clearly it's not an exact match because we haven't gone on off the

[00:15:55] cliff yet but it's just very similar to I'm amused. Yeah this that's an example people use right

[00:16:02] of what the Fed maybe has learned since then in terms of they've learned some from some of those

[00:16:06] examples through there and through the depression they've maybe learned how to we'll find out here

[00:16:09] if they have but you know maybe they've learned how to better use policy and obviously they have

[00:16:12] more policy tools than they're disposal now than they did then. Yeah yeah.

[00:16:18] Can you just talk a little bit about that like how different

[00:16:22] if we if I was on the ground at that time like it seems like there's so many different things

[00:16:26] that would have been the case than now. I mean we take for granted all our technology and you know

[00:16:30] the Fed being what it is today and you know the fiscal stimulus being what it is today like

[00:16:35] how different did the world look back then? Yeah I mean I think it was more you just

[00:16:40] have to be like policy I think it was probably a little more clumsy back then I mean we have a lot

[00:16:45] of benefit having watched the Fed make mistakes in the past and I would argue the two biggest ones

[00:16:51] were allowing the great-to-pride allowing the bank to exist on to essentially implode in the 1930s

[00:16:56] then the second one was on the opposite end of the spectrum which was allowing inflation to

[00:17:00] feel entrenched so you know it's kind of a general question if I had to answer it at a high level

[00:17:08] I would say things are less different than you think. I mean yes technology has has advanced

[00:17:14] the Fed has has learned a lot of the X differently in response to crises having the

[00:17:19] bank better in response to crises but at the end of the day human behavior doesn't change very

[00:17:25] rapidly and I think things are at a high level things are more similar than people think.

[00:17:30] Yeah that human behavior thing is such an important point I mean if you look back and not just

[00:17:34] for people on the outside like me but for the Fed and for everybody you know we can certainly learn

[00:17:37] from history but we're not we're not going to get rid of the mistakes you know no matter what happens

[00:17:41] here we're going to you know the Fed continues to make mistakes now you know they have in the past

[00:17:45] and part of it is just they have a very very difficult job obviously trying to look at everything

[00:17:48] and figure out what to do it is very challenging. I want to ask more about the inflation

[00:17:54] because we are dealing with inflation for the first time in a really really long time

[00:17:57] and for people like me for my entire career I really have never seen about with inflation

[00:18:03] and you know you reference some periods we could look at to look at inflation but you know the one

[00:18:08] that most often gets reference is the 1970s and I'm wondering if you could just talk a little bit

[00:18:12] about that because a lot of people are saying they're going to get a repeat of that. That is the

[00:18:15] most relevant periods look at right now but it's not because I think we're going to answer it I

[00:18:20] actually don't it's because the Fed isn't a position right now where if they make the same mistakes

[00:18:27] that they made in the late 1960s we couldn't go into that but if you look at Powell's statements

[00:18:32] if you look at most FOMC members they can't handle all of them but most of them they're very well

[00:18:37] aware of the mistakes that there's been a lot written on it they're very well aware of the

[00:18:43] mistakes that were made in the late 1960s and I actually just posted something today on LinkedIn

[00:18:49] following the last CPI reform but it just validated why it was very important for the Fed.

[00:18:55] They seem to be signaling kind of a dovish pivot in December of 2023 and yeah I wrote about

[00:19:03] when they did that then this is premature and but they didn't leave enough room to backtrack

[00:19:08] and now they're backtracking and this is why because if you you abandoned this was one of the big

[00:19:13] mistakes of the 60s and 70s if you abandoned monetary tightening too early a inflation comes back

[00:19:19] you have even incrementally higher levels it becomes harder incrementally harder and harder

[00:19:23] and more capable to extinguish and that that is in my mind that is by far the biggest danger it's

[00:19:29] not that we're going into the 70s it's that the Fed needs to avoid making the same mistakes

[00:19:33] that they made in the late 1960s to ensure that and I think they will. Just one comment there it's

[00:19:38] like the market seems to want Fed to lower rates and takes that as a positive but yeah if that

[00:19:47] happens too quickly and like you're saying the inflation comes back the actual long-term

[00:19:52] negative is much more so it's like absolutely I mean that was the lesson that's why I took

[00:19:57] whole book or going up to 20% to team inflation it was entrenched in the economy it was built into

[00:20:03] labor contracts it was built into pricing strategies built into the American mentality and once that

[00:20:10] happens it's really really hard to become incrementally more painful to reverse and that's exactly

[00:20:15] what happened the way they've since the 60s and 1970s now there are a lot of other reasons why that

[00:20:19] happened unfortunately that are not present one of them being a lot of political pressure but

[00:20:26] you know I don't see that that happening again and I think the Fed's latest messaging and decision

[00:20:34] of January confirmed that they're on it yeah and Powell seems to be if he's going to make an error

[00:20:39] it seems like he's going to make an error on being too tight he seemed like he should not wanting to

[00:20:43] repeat the there were you know mistakes of the 70s that seems to be if he's going to make a mistake

[00:20:47] he's going to make it that way so it seems like he is going to stay the course here really I agree

[00:20:52] I think they were premature and I've been largely supportive of the Fed ever since they started

[00:20:57] typing aggressively I think that little dovish chilt that they didn't December was risky I didn't

[00:21:03] think it was a huge mistake because they left them they left themselves in an upper end of

[00:21:08] the backtrack which they did but you know I thought that was premature in December I'm just

[00:21:14] wondering if you have an opinion on Paul Volker you know he gets he's kind of known as the guy who

[00:21:19] broke the back of inflation and we've had guests in the podcast who have sort of gone both ways on

[00:21:23] that who some people who said that's exactly what he did you know he did what he had to do he broke

[00:21:27] the back of inflation and other people were kind of saying the forces of the 70s that were causing

[00:21:32] the inflation were sort of dying out anyway at that point and you know maybe he didn't have to do what

[00:21:37] he did so I'm wondering just as someone who studied history in a period in the former camp that

[00:21:42] I'm assuming they're referring to some of the oil you know the oil related the embargoes in

[00:21:49] the in the early 1970s where I think it was 73-74 that did add to the inflationary pressures but

[00:21:56] there there are a lot of papers that have been written it's pretty clear that the inflation of

[00:22:02] the 70s was a monetary phenomenon yes was amplified by some some shocks like the oil price shocks

[00:22:09] but it was absolutely a failure of the Fed to maintain tight monetary policy when it was needed

[00:22:15] and contain inflation I don't subscribe at all to the belief that this was something external

[00:22:21] at Volker had nothing to do with say we think you have everything to do with that

[00:22:25] can you talk about we've talked about the Fed a lot but we haven't really talked about why they

[00:22:28] exist and that's an interesting part of the book and that's something I didn't know I sort of

[00:22:32] knew but I didn't know as well as I should have can you just talk about the story of the past that

[00:22:35] led to the Fed being created in the first place well the Fed was first was the third central bank

[00:22:39] there was a Alexander Hamilton established the first bank in that in 17 the charter with actually

[00:22:47] in 1711 but called 1790 and then it was eliminated for I think five or six years and then

[00:22:54] the second bank came in and Andrew Jackson got rid of that in the national banking system

[00:22:58] the federal reserve act was not passed until 1913 in December of 1913 and the real trigger to bring

[00:23:05] back a central banking system was the concept of currency in L. S. Tisthiti which you had an

[00:23:13] interesting situation back then where you had a lot of farming kind of country banks would park

[00:23:19] their cash in New York City and then they would they would take it out in the fall months and then

[00:23:25] kind of read the pot to kind of you know do all the spending for harvest thing and then when they

[00:23:30] got their money back they would put it back into the New York City banks in January February

[00:23:35] it's a long story but there every every that's why clinics would happen in the fall because

[00:23:40] there'd be a shortage of cash in New York City in in the fall months so they were always vulnerable

[00:23:45] to panics in like the September October timeframe and what happened in the panic of 1907 is

[00:23:50] you had added to that there was an earthquake in San Francisco in 1906 which would

[00:23:55] collect money abnormally out of New York City and then you have the agricultural kind of pulls

[00:23:59] to the country banks at the same time so you had a shortage of cash and you started seeing bank

[00:24:04] uh it's particularly the trusts which without getting into details they're a little different than

[00:24:08] the national banks what happened is this was kind of the high of J. P. R. Fronten Markins career

[00:24:15] he orchestrated a bunch of private rescues that fairly prevented just an all-out run on the system

[00:24:21] and collapse of the banking system after that there was enough momentum to bring back

[00:24:27] the uh the federalists are and I'm sorry to take us to back the what essential bank does in a

[00:24:33] situation like that is we'll essentially provide emergency currency to banks to prevent bank runs

[00:24:40] because we didn't have that J. P. R. Fronten Markins had to do and I had to work to stay private

[00:24:45] rescues after that the experience was so traumatic J. P. R. Fronten Markins died in 1913

[00:24:51] and the thought was we the nation had really outgrown it's a ability to operate without a central bank

[00:24:58] and that prompted the passage of the reserve that's in 1913. It's just funny when you hear stories

[00:25:03] about like shortages of cash in New York City and you think about where we are today

[00:25:07] you think about how far we've come like people hitting computer keys now and buttons on their phone

[00:25:10] you know to thinking about what the dynamics were like at a time like that yeah I mean it was

[00:25:15] an interesting I mean what really close the panic of 1907 happened which was in October of 1907

[00:25:21] happened 18 months earlier in San Francisco there's a major earthquake and for lead construction

[00:25:26] that pulled a lot of cash out in New York so when you have the typical agricultural financing cycle

[00:25:31] in the fall month they were already short and they were very vulnerable to the bank.

[00:25:37] Just talking about the Fed in general you know one of the ideas you hear a lot and I don't want to

[00:25:40] get your opinion of it's true is since 2008 really has been a completely different thing for the

[00:25:44] Fed relative to what they did for the entirety of history in terms of quantitative easing and the

[00:25:48] size of their balance sheet and the tools they're using I mean is that true we've really seen a

[00:25:52] very different Fed since 2008 than we did for the rest of the history. In some ways um I think the

[00:25:58] main difference you know we we had a couple of questions and we were pondering back and forth

[00:26:02] and I think the biggest difference in the Fed today is that I thought a lot about that are they more

[00:26:09] are they more prone to interventions that and they definitely are more proactive in response to crises

[00:26:15] but I would argue that that's a good thing because they're failure to be aggressive when they were

[00:26:21] needed in the past what led to some pretty dramatic events and it's kind of on both ends of the

[00:26:27] price incidence of the Sledi spectrum is the failure to contain the bank runs in the early 1930s

[00:26:33] was was was really what allowed the great depression to severely deepen and extend they learned

[00:26:40] from that and that's why you saw impressive Fed intervention in 2008 and 2009 then the great

[00:26:46] inflation I think they've learned from that too if they had kind of caved to the demands of

[00:26:52] the market to shift to a more dovish policy earlier than Venezuela we could have another great

[00:26:59] inflation event so I think the Fed has changed in terms of being more proactive and having a bigger

[00:27:06] presence in crisis but I personally think that's a good thing and if you look at the smoothness

[00:27:10] of the business cycle and the frequency of recessions and the depth of recessions it does seem like

[00:27:14] we're better now than we were in the past so it does seem like this stuff is helping yeah I mean some

[00:27:19] of the the panics were just you also it's not just the Fed I mean that we have more diverse

[00:27:25] subcut economy you know we have more effective regulation and stronger institutions so it's not

[00:27:33] just the Fed I mean it was just for those who have read or will read about the gilded age and

[00:27:39] the late 200s I mean it was there's a circus back then there were no rules and it was so bad

[00:27:45] it was it's hard not to laugh but I mean it was literally a circus you had literally circus

[00:27:50] clowns becoming some of the major stock operators on Wall Street I'm not joking they literally

[00:27:54] were you know I had clowning backgrounds I wouldn't ask you about bubbles because that's something

[00:28:00] when you study history I think you probably can learn a lot about and you know the dot com bubble was

[00:28:05] you know very very transformational for me because I live through it you know we were running a company

[00:28:09] like in the tech space during then and it was you know it was a pretty ugly situation and now

[00:28:13] we have people talking about with AI that we might see another bubble and I'm just wondering what

[00:28:16] are the biggest lessons as you study bubbles through history what are the biggest lessons you take

[00:28:21] their hard to do the sex the hardest ones to detect are the ones where they're hard to detect because

[00:28:27] usually the ones that are the worst are based on a technology or a new product that actually

[00:28:34] has real value and the dot com was a great example of that I mean the internet and e-commerce

[00:28:40] was a tremendous invention the problem is everybody starts pouring money there's an under you

[00:28:46] you don't know when and how big it's going to be so everybody starts pouring money in it

[00:28:52] and you know these these types of situations are prone to in aggregate there's too much

[00:28:57] money in whatever innovation people are chasing and that leads to to bubbles and I think AI in terms

[00:29:06] of comparison the history actually does remind me a lot of the dot com in the sense that there's

[00:29:11] there's definitely real value to the AI related technologies that are coming out but if you look

[00:29:18] at people's advertisements though everybody regardless of what industry you're in is saying that

[00:29:23] they're AI available and you know there are a million AI companies out there a lot of it's just

[00:29:28] garbage so it's a lot like a dot com you know Amazon came for the very real innovation came from

[00:29:36] that dot com error but you know it's just things like that are prone to a bubble because

[00:29:43] the magnitude and speed of the impact for undefined and people tend to overshoot yeah and you

[00:29:48] remember back in the dot com day is like putting dot com after your name like led to a doubly

[00:29:52] retripling of your stock it was it was crazy just the same thing you're seeing with AI now I guess

[00:29:56] you people want AI in their name but that's not unique either there's a story from I don't

[00:30:02] know where I read it but there's a story from the 1920s starting to worry 20s where

[00:30:07] see a company called seaboard airlines which was a railroad company when

[00:30:15] they just went through the roof because people thought it was an airline company rather than a

[00:30:19] railroad company I mean just just the name alone what would close the company go through the roof

[00:30:23] so you see things like that all the time yeah and then to your other point of bubbles like it seems

[00:30:29] we always after the fact want to say oh the bubble was obvious but to your point it's very hard

[00:30:34] when you're living through them it's very hard to know if you're even in it or when it's going to end

[00:30:37] like it's yeah it's great to look at after the fact but to do anything about it is very very challenging

[00:30:43] no I would argue we probably are in one with AI in the sense that there's more over

[00:30:48] are there revolutionary company that are coming out going to come out of it sure but my guess is

[00:30:53] an in aggregate the investment there exceed the value one of the things you talked about

[00:30:59] earlier is this idea of shadow banking and that's something you hear a lot now and you have throughout

[00:31:03] history in terms of like risks to the financial system and one of the things I thought was interesting

[00:31:06] when I was reading the beginning of the book you were talking about trust companies of the early

[00:31:10] 1900s and you were talking about this idea that shadow banking is not really a new thing so can

[00:31:14] you talk about that a little bit yeah so it now is a little different back then because you actually

[00:31:19] didn't have the federal reserve during this was during the panic of 1907 but you had without

[00:31:24] getting into the details out of there was a state more stable and more well capitalized national

[00:31:28] banking system and then there were trust companies that did a lot of the activities

[00:31:35] that national banks did but they were regulated at the state level which was far less

[00:31:40] uh of a reserve or fireman it was just less regulated and those were really proliferating in

[00:31:45] York to the point that they had assets that roughly matched the national banking system but lacked

[00:31:51] the protections and the discipline that the national banking system had so when there was a run

[00:31:57] the banks in New York during the panic of 1907 it was really the trust that were vulnerable

[00:32:02] to that reason and it's a they I would consider them a shadow banking system even though you didn't

[00:32:08] tab a federal reserve system at the time but you did have a national banking system which was stronger

[00:32:12] what did like a bank run look like back in those days like it's right now like I mentioned earlier

[00:32:17] you got a bunch of people hitting them you know buttons on their phone and Silicon Valley when Silicon

[00:32:21] Valley banks failing trying to get the money out it obviously looked a lot different back then like

[00:32:25] yeah what was it like on the streets during a bank run i mean i was a bear but you know you have lines

[00:32:30] of people around the point you have to go to the teller window to get your money out

[00:32:34] and it's i'm sure it was terrifying people's life savings could be severely damaged or

[00:32:42] eliminated entirely and you didn't have the protections that you have now you didn't have FTI

[00:32:47] insurance FTSC insurance back then you didn't have a federal reserve system to to help a bank

[00:32:54] that was technically solvent but just didn't have the liquidity that they needed so you know one

[00:32:58] of the interesting thing is that I still can't find a citation i know for a fact i read it

[00:33:03] was that anything could trigger a bank run too it didn't necessarily have to be

[00:33:07] that that the bank was poorly capitalized there's one story where there was a line forming

[00:33:13] outside of a store near a bank and people thought that there was a bank run in progress so they

[00:33:19] ran on the bank even though there was nothing there's nothing wrong with it happened to be

[00:33:23] located next to a store where there's a long line so yeah i'm sure there were scary sites to be

[00:33:28] old yeah the bankros are tough because there's not i mean there's really no banks even today

[00:33:32] that if every single depositors showed up and said i want my money back could provide it

[00:33:36] so a lot of it is a it's a confidence game like you have to have confidence in the system

[00:33:39] and in the bank and you know people lose that confidence that's where you get in trouble

[00:33:43] yeah and that's why you have the seed cards they have today you have the fed that can provide

[00:33:47] liquidity if needed in exchange for you know taking assets off a bank left like what assets

[00:33:52] up as a banks balance sheet and you have fdi the FTI c insurance is very important because

[00:33:59] that eliminates the incentive i mean everyone does have a rational incentive if you don't have

[00:34:04] it if they're deposits you know this fear in their analog they haven't incentive to get there's

[00:34:10] out before everyone else's so there's a real incentive to run which is why you have to have these

[00:34:15] protections that we have to have what is the history of FTI c insurance like how did it come about

[00:34:20] the interesting thing about the FTI c insurance is that Rosa belts and think it was

[00:34:27] Carter glass did not support it it was actually forget the it was a congressman from a

[00:34:36] south-east I think it was Alabama that really pushed to have that into the legislation and

[00:34:42] the reason why they didn't have FTI this is another way that looking at the past kind of people

[00:34:48] always are trying to solve the problem problem during the backgrounds and I pray depression

[00:34:52] were with a small banks it wasn't the large banks and we'll follow the runs were on the small

[00:34:58] banks that people felt comfortable putting their money into the larger banks and the reason that

[00:35:04] that Roosevelt was against and I believe those Carter glass was against putting FTI c insurance

[00:35:10] into the legislation is because they feared it would prop up the small banks who were weak and

[00:35:15] that that didn't seem productive but you know did it end up going into the legislation but that's

[00:35:21] the history of it you almost didn't it's one of those valuable things about the the last evil act

[00:35:27] that was was having that in there just curious um you know we're in a period now where the country is

[00:35:35] very divided politically and obviously we're an election year and so it's even more heightened with

[00:35:40] the two candidates that we have and you're but you know you you don't know if like it's just because

[00:35:46] that's the period we're in so it's seen like it's that heightened but was there anything in your

[00:35:50] research that sort of you looked at said oh yeah okay we've been politically divided as a country

[00:35:55] for a long time here and this is kind of similar to other things yeah I feel more in the latter

[00:36:00] camp that there are some unique things going on right now um yeah I I steer clear of politics

[00:36:09] just because I don't think it's my role as a financial historian to to cross that bridge but you know

[00:36:17] when I think is overblown I've put a lot of people talking about that what we're experiencing right

[00:36:22] now is a lot like the 1930s and there are some elements that are similar but I actually don't

[00:36:27] think words words and what that things in the 1930s were for with I mean we had basically

[00:36:33] average unemployment of 20 percent by like a decade and you have massive instability in Germany

[00:36:39] and Japan I don't this doesn't strike me as that severe um the the period that seems most similar

[00:36:50] although I wouldn't say it's you know like we're going through it again it's kind of the 60s and 70s

[00:36:55] where you had a lot of disagreement on social issues and changes you had a a lot of disagreement

[00:37:04] on where government spending would go and then you had some inflationary pressures and um that

[00:37:11] that seemed to me the most similar but I you know I don't think there's a free comparison

[00:37:16] but if you're just looking at the political environment of where we are now versus

[00:37:21] somewhere else in the US history right about it's the it's a further one answer

[00:37:27] yeah that's that's fair um what about the idea of a trend towards I guess more de-globalization so

[00:37:34] us maybe after covid bringing some of these supply chains back to the home shores and manufacturing

[00:37:42] back home I'm thinking does that all correlate with what happened after world war one or world war two

[00:37:49] yeah that's the thing that I don't think it nearly to the level what are the problems with

[00:37:55] that led up to world war two was the better than labor trade policies where different countries

[00:38:01] would keep erecting different trade barriers and global trade really collapse and all of

[00:38:07] being equal that that is problematic well for a couple reasons one it countries that are

[00:38:14] inter-interdependent are less likely to fight each other and combat because it's just

[00:38:19] it's too bossy to defend on each other too much so the more that gets reduced the less barriers you

[00:38:23] have to to war the second thing is I talk about this in the book but I mean the great depression

[00:38:30] and the better that neighbor trade policies really is what prompted the the outbreak of world war two

[00:38:38] and it was especially impactful in Japan because the japan was a country that

[00:38:43] relied so much on generating foreign currency from their exports and the the collapse in trade

[00:38:52] left them bankrupt essentially and that forced them they have no natural resources to Japan so I

[00:38:57] had to get them somewhere and that one of the solutions was essentially invading maturia and then

[00:39:03] and then moving south through China so I have I haven't seen you know we had some tariffs under

[00:39:10] Trump and I think I've heard that there's more talk of that but that's that's not at the level

[00:39:19] that was present in the in their early 1930s I know in the book you talked about some of the

[00:39:27] lessons that you drew from this and I wanted to get to that in a minute or two but I'm just curious on

[00:39:32] um you know the country has largely 50 years ago there was much more pension plans and people

[00:39:38] in retirement dependent much more on pensions and we've corporate America has you know largely migrated

[00:39:46] away from that although interestingly enough I saw a recent article that IBM is actually re-opening

[00:39:51] its pension plan because they're actually going to save money um yeah but I'm just curious like

[00:39:57] what what a what a given your perspective of the history of our country do you think that's been

[00:40:04] net good or net bad for well also some misunderstanding of why pensions were established so

[00:40:13] you know a lot of the state pensions were established because you know a lot of state employees

[00:40:17] are not eligible for social security so that's kind of the form of social security at state level

[00:40:22] and local but even the corporate pensions that were established in the the four-eason-50s

[00:40:31] that was to avoid taxes so if you look at tax rates back then they were extraordinarily high

[00:40:37] and corporations were making a lot of money because of the arsenal of democracy which was

[00:40:41] the buildup for World War II so a lot of pensions were way of compensating people without getting

[00:40:47] taxed so I think there's a little misperception that that pensions were established just for the

[00:40:54] well-being and future of workers that there were some ulterior motives there but you know

[00:41:01] at a big picture level the United States Americans do have a problem with saving a lot of people

[00:41:07] are unprepared for retirement and it's a big problem like I guess the only caveat I would say

[00:41:15] if not like corporations and governments were so heavily focused on that back then it was

[00:41:23] there are a lot of reasons other than that that led to the development of a lot of these plans

[00:41:30] one of the other things I think that you talk about in the book is sort of how you personally

[00:41:34] has maybe gravitate a little bit more towards index funds and low cost investing and you know

[00:41:42] that is clearly you know there's the argument how much passive is influence on the market and

[00:41:47] obviously more and more investors have migrated to passive investment strategies low cost strategies

[00:41:53] do you want to do you have any I guess feelings or thoughts on whether or not you know and there's

[00:41:59] that famous paying gram quote like you know in the short run the market is a voting machine

[00:42:04] and the long run it's a weighing machine and some people argue that the passive flows are

[00:42:09] kind of taking fundamental investing sort of out and it's just based on sort of where the

[00:42:14] flows are going so this isn't necessarily a historical question but I'm just wondering your thoughts

[00:42:18] on it in general if you have any my thesis on passive is just really the evidence that it's

[00:42:26] it's just very difficult for anybody there's like two derivatives that it's very difficult for

[00:42:31] anybody to outperform the market and it's even more difficult for people to identify people who

[00:42:36] can outperform the market you know so accepting managers so you know dealing with institutions

[00:42:42] it it takes a while to see the see to see the same cycles over and over but

[00:42:47] we hear it's actually particularly I actually think passive is actually more appropriate for

[00:42:51] different situations because they're run by committees that turn over so frequently

[00:42:56] I often joke bad that working with an investment committee is like working with a client that

[00:43:01] has a personality change every four or five years so you have these cycles of where they go into

[00:43:07] investments at the wrong time and then get out of them at the wrong time higher in fire managers

[00:43:12] you know fire met the peak higher at the bottom and I'm sorry fire met the bottom and higher

[00:43:18] met the peak it just repeats over and over so it's almost like indexing using passive is a hedge

[00:43:24] against the instability of governance for institutions and then for individuals yeah there's

[00:43:30] a significant cost savings and it's just very hard to outperform the market and the reason is because

[00:43:35] there's just so much you can't manipulate the market anymore I mean I guess you can if you're doing

[00:43:41] a game stop thing and insider trading is illegal that's how people used to make money in the market

[00:43:48] for like 170 years and once that got eliminated it just the market's too efficient to outperform

[00:43:55] reliable over a long period of time do you think in any way I'm just wondering like based on your

[00:44:00] study of history do you think active management is harder now like with everything that's

[00:44:04] happening with technology it's always been a problem or do you think it's more difficult now

[00:44:07] statementally I think it probably is but it wasn't easy that's one of the funniest things so if

[00:44:13] you go back to the before the securities exchange act of 1934 which outlawed market manipulation

[00:44:19] and insider trading the way you made money on Wall Street with not analyzing securities it was

[00:44:24] manipulating the market through quarters doing bear raids doing the using stock pools to manipulate

[00:44:29] the stock insider trading with legal so they kind of knew that it didn't really make sense to

[00:44:37] analyze securities even in the 1800s you just manipulated the market and did insider trading

[00:44:42] that's he made money so it's a fundamental there's a chapter of the book where I talk about the

[00:44:50] concept of the wisdom of crowds which is if you have something of uncertain value and everybody has

[00:44:56] the same information and they have to guess that value the guesses above and the guesses below

[00:45:01] tend to cancel themselves out in the average it's actually pretty darn close to the real value

[00:45:06] and it's very hard to beat that average and that's just a principle that applies to

[00:45:12] economic forecasting it applies to earnings estimates and it applies to pricing the value of

[00:45:18] the securities just very it's very hard to be able to figure out something if everybody has the same

[00:45:23] amount of information that is meaningful and different and that's why I talked about a performance

[00:45:29] yeah and I wonder if it got harder from the perspective of you know if you think back in the day like

[00:45:33] if you wanted to analyze the fundamentals of a company you might have to go to the library you

[00:45:36] might have to get the information like there always might be some edge in trying to obtain it but

[00:45:40] today it's like everything is you know you can get on your fingertips so I can go on the internet

[00:45:44] right now and I can get whatever I want I would you're probably right but it's almost like

[00:45:48] splitting here it's been a it's been sufficiently efficient for a while now whether it be squeezed

[00:45:53] the little more out maybe maybe not but there wasn't much more squeeze in my opinion

[00:46:02] you sort of end the book

[00:46:05] not sort of I think you end the book on a positive note with the in the last chapters

[00:46:10] reflections on the past and the shadows of America's future and you sort of you know present the case

[00:46:16] that listen we've been through a lot as a country our financial history we haven't been perfect

[00:46:21] we have like a lot of battle scars but you know like betting against America is probably not the side

[00:46:28] that you would want to take so I just didn't know as we kind of get towards the end here if you

[00:46:32] want to flush that out a little bit you know it's um and I'll comment on I know there's another

[00:46:38] issue that we discussed on I'll go deeper into it but I went into this kind of pessimistic about

[00:46:44] the United States but then I found out after reading newspapers about 100 years ago 150 200 years ago

[00:46:52] there's always every generation thing so last one that the world's going to go into hell and

[00:46:59] you know this is it and to be honest with you I think there are a lot of situations in US history

[00:47:05] whether there is a better argument I mean living in in 1941-1942 it did look like the world was coming

[00:47:12] to an end living in the 1840s it was the disaster so it just kind of taught me that

[00:47:22] things happen worse in this country significantly worse and we get through it and I think

[00:47:27] some of the the enduring values that we have in the United States will enable us to get through

[00:47:35] the the next crisis and that is hard work and being a people that likes to improve things there was

[00:47:42] everybody like that no but I think we have enough people that believe in fixing things making

[00:47:49] things a thing making the world a better place innovating and I don't think that's fear had

[00:47:55] had died in the United States no I do think we have some unique challenges I feel the debt is

[00:47:59] leaving getting to this but I think that is actually the biggest challenge that we have in this

[00:48:03] country it's a very different mentality than it used to be but I have faith in the American system

[00:48:09] I really do well let's flush the dead thing out before I kind of have the final two questions for you

[00:48:14] so just generally I mean what are we now so we're at I think after COVID with all the statistical

[00:48:20] stimulus I know the sad balance sheet was sitting around eight trillion I think roughly something

[00:48:25] like that and the national debt is like north of 30 trillion if I have my numbers correct or

[00:48:29] something like yeah what concern you about the debt is less than number and more of the mentality so

[00:48:35] if you look back to 1790 when Alex the inter-headleton repaired the financial system we were

[00:48:40] in disarray I mean we're bonds issued by the four columnist out then states and the continents

[00:48:48] of Congress were trading like 20 cents a dollar in a lot of cases and Alexander Hamilton what he

[00:48:53] did is he consolidated that raised tariffs and created a system to to pay it down and two of the

[00:49:00] principles that he establishes one it's critical for nation to have excellent credit because when

[00:49:07] there's an emergency mostly foreign war it's why you termed it that's when you need to use it even

[00:49:12] if you're wealthy nation you need to use that that and that's what we did in the war 1812 we did it in

[00:49:17] the civil war world war one and world war two but he also said that it was very important once the

[00:49:23] inter- once the emergency subsides to pay down the debt and we did that after those wars except for

[00:49:29] World War Two and the reason is first of all we had the the new dominant reserve currency so we can just

[00:49:35] you know do that gives you more freedom to issue debt but there's also a change in mentality

[00:49:43] that was a function of our perceptions of wealth so after World War Two ended

[00:49:51] first of all we had gold was kind of money under Bretton Woods and we had 70% of the world's

[00:49:56] gold reserves we it's like we had all the money in mind off way you know and more importantly

[00:50:01] the whole world was destroyed I mean the infrastructure of Europe, Russia, China

[00:50:08] the the infrastructure of Japan their their infrastructure was destroyed and ours was actually

[00:50:12] massively increased because we were we were building everything for our allies so we had

[00:50:18] tremendous wealth and we had tremendous ability to continue generating more wealth

[00:50:23] and that gave us a different perception I don't know of poverty in our ability to fund social

[00:50:32] programs and where we kind of turned was in the 1960s under the great society where the goal is

[00:50:38] not just to you know reduce property was eliminated entirely and that's when we started a lot of

[00:50:44] the programs that seemed affordable at the time because we're tremendously wealthy but as the rest

[00:50:48] of the world cut up caught up they became less affordable and that's the hardest thing that we

[00:50:54] had to deal with right now because nobody remembers what it was like before then this nation

[00:50:59] you know it is that the fiscal deficits are like definitely I mean they're un-sustainable I mean

[00:51:04] just you can just do that and then the challenge is nobody remembers that spending was not only

[00:51:11] like always life is the way that debt used to work was it was used during times of emergency

[00:51:17] primarily and paid down after and it's going to be hard to convince the Americans that that's

[00:51:25] we can't keep dealing with this because we've been doing it for so long that's tough

[00:51:30] tough mindset changes that's all you can ever know and you know yeah so well thank you for that

[00:51:35] that was I'm glad we hit that um so kind of just to wrap it up two last questions what do you think

[00:51:42] the biggest lesson for the average investor is from from the book and do you have a biggest

[00:51:51] lesson that you've taken away that might be similar or might be different than what you think

[00:51:55] the average investor and they probably the same which is the way to all sort of the second question

[00:52:03] first this is what I hope to communicate to others I was I had a weird experience so there's

[00:52:09] one in a more very well-hungary who wrote the financial history of South Africa and we were

[00:52:16] doing this at the same time and didn't know that we were both writing financial histories of

[00:52:21] our countries and we met online and we talked about it and we're talking about the end

[00:52:25] at the end about how this changed us and she said you know it just made me more calm

[00:52:31] looking at 200 years it's kind of like you've seen it all and when something happens

[00:52:38] first of all supposedly instantly know what's the comparable and how this could play out

[00:52:43] and you just no longer get any key about about stuff that comes out the news because

[00:52:48] the for the most part you've seen it before and that's that's the way it's changed me the most

[00:52:52] and in terms of value for the book that's what I'm hoping to communicate I hope that when people

[00:52:58] walk through this book that they get some of that sense of calm that it's very rare to see something

[00:53:06] even if it seems catastrophic in the moment that is really going to be catastrophic this nation

[00:53:10] is very resilient America be American people are very resilient and we've seen very bad times

[00:53:16] before we've been rich from the room and I think we will again and that's that's how it's changed me

[00:53:22] and I hope that that's some that I can help people have that feeling good stuff Mark we wish you all

[00:53:30] the best with the book thank you for joining us all right thank you thank you both for having me

[00:53:35] thank you thank you this is Justin again thanks so much for tuning into this episode of excess

[00:53:40] returns you can follow jack on twitter at practical quatt and follow me on twitter at jj carbono

[00:53:48] if you found this discussion interesting and valuable please subscribe and either iTunes or on

[00:53:52] YouTube or leave a review or a comment we appreciate Justin carbono and jack forehand our principles

[00:53:58] epilogue capital management the opinions expressed in this podcast do not necessarily reflect the

[00:54:02] opinions of a lidiacapital no information on this podcast should be construed as investment advice

[00:54:06] securities discussed in the podcast may be holding stuff clients of lidiacapital