Ep599: Kirk Chisholm – A Paradigm Shift Is Happening in the Markets

Andrew Stotz 00:02
Hello, fellow risk takers and welcome to My Worst Investment Ever, stories of loss to keep you winning. In our community, we know that to win in investing, you must take risks but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And that mission has led me to create the Become a Better Investor Community. In the community, you get access to our global asset allocation strategies and stock portfolios, our investment research weekly live sessions and the risk reduction lessons I've learned from more than 500 guests go to MyWorstInvestmentEver.com right now to claim your exclusive podcast listener. Lifetime discount. Fellow risk takers, this is your worst podcast hosts Andrew Stotz, from a Stotz Academy, and I'm here with featured guests. Kirk Chisholm, Kirk, are you ready to join the mission a second time?

Kirk Chisholm 00:54
Of course, I'm ready to join. This is great. Andrew, I have to say I love your radio voice. It's it's definitely one of the better ones I've heard. So kudos for you, whatever. You're doing your gargling whatever it is, it's working man. It's awesome.

Andrew Stotz 01:07
Using the depths of my stomach. I see I met this lovely lady that runs at the park near me, and we'd become friends. And I was like, what do you do? So I'm a, I'm a vocal coach. I'm like, I need to learn more and get better from her. So I haven't set up my appointment. But I think I've got to just keep improving. They're nice. Well, let me introduce you and to the audience. Kurt was on the podcasts in October of 2019. That was episode 138. You can go back and listen to his experience about investing in Chinese companies. I think it was I recall.

01:46
Yep. Yeah, it was Chinese companies. Absolutely.

Andrew Stotz 01:49
Yeah. So. So Kirk is a wealth manager and principal of innovative advisory group and hosts, ladies and gentlemen of the popular podcast, Money Tree investing, it's on my download list. And I listen to it, every episode. He and his firm specializes in risk management, inflation, self directed IRAs, alternative investments, and advanced tax strategies. They truly are outside the box thinkers in everything they do, as you will hear on this show, as we talk, Kurt is unique and all around, hey, interesting guy, he and I just had like a 20 minute conversation about some interesting stuff. And could take a minute and tell us about the unique value that you bring to this wonderful world.

Kirk Chisholm 02:40
Yeah, you know, despite being a podcast shows, I really hate talking about myself and are. But I will tell you, I'll give you a little bit of background here. So, you know, I run an independent raa out of out of the Boston area. And you know, we're very, very much we started the firm being outside the box thinkers. You know, we kind of look at the world with a certain lens. And we look at how other people see the world. And sometimes you scratch your head and just say, what are they thinking? Right? And we'll probably go over some of those today. But, you know, really, the way we look at things is different, you know, we look at, you know, how can we look at investing with a better lens, right? Most people have a certain lens in the world, and they say, Oh, this is how things are this is quote unquote, reality. And I would argue that it's really hard to define what reality is, because each one of us, I'll give you a give you a great example. Right? You take the US you've got two sides of any political issue, take any issue doesn't matter. Just take, you know, Roe v. Wade was in the news in the last few months because of the Supreme Court decision. So you have one side of the issue that has one opinion. And one side of the, the other side of the issue has another opinion. And you're saying, well, they're wrong. They're evil, or they're stupid, right? You know, what they're saying about you the exact same thing, right? So everyone's got their own perspective. So if you have to think about it, who are you to say that you're right, and they're wrong, right, because everyone's different, they have a different perspective. So the difference of what reality is can change, but what is helpful is having a good framework on seeing reality so that, you know, I think the goal is to, to be able to predict where things are going with investing with some degree of relevance, right? You know, it's not a coin flip, there's maybe a little bit better chance than that, if you're looking at things correctly. So we try to bring that to our podcast, we try to look at different issues from a different lens. We try to give people practical frameworks that they can look at, we don't tell you what to invest in, we tell you how to invest in it. So how to think about it. Right? How should you think about this issue? Everyone's telling you what to think we're telling you how to think and then you can make your own decisions. Right? What's the old adage you teach a man to fish versus giving them a fish to same thing, we're not gonna give you a fish. We're gonna teach you how to fish. You can fish yourself, but the idea is If we can give you those frameworks, then you're in a much better place to make good decisions. So, you know, that's the podcast or firm, we, we just think outside the box, you know, we try to solve problems. So Oh, we got this problem of paying too much in taxes, let's find a solution to that, you know, like, we need to fight, we need a way to reduce risk and portfolio is great. Everyone else is doing it this one way, let's try something new and see what works. And we've found some tremendous risk managed solutions that I was surprised other people haven't found, once I dug into it, I realized why but, you know, people are setting set in their own ways, which is part of the problem. But that's a little bit about me, and kind of how I see the world.

Andrew Stotz 05:42
Well, maybe the people don't hear it, because they're, the band is playing so loudly and the the bandwagon effect, has got them marching behind the band. And it's the bandwagon effect is a fallacy where you are caught behind the leaders in the music, and you are, you know, following and I was last night, we had our Annual General Meeting for CFA society, Thailand. And they asked the past presidents to get up and talk about on a little panel. And we talked about a bunch of things, the first president, and then the second one, and then I was the third in the 20 year history of the CFA society tiling. And they asked me, you know, like, what do you think about the future for CFA and all that, and I said, The future is at risk. The future is at risk. Because you know, anybody can learn about financial analysis on YouTube nowadays. And there's nothing special about our curriculum and all that. And I'd say the only place that we ultimately can beat anybody is ethics. And I would say that the top area of ethics that's most critical to me is about independence and objectivity. And many people get confused when they're talking about out of the box thinking and that independent and objective thinking does not mean that you always have a different opinion from the crowd, it means that you've arrived at your conclusion through independent and objective analysis. And I think that that there's a real threat that's going away. And that, ultimately, is the value that I think you can bring to your audience and bring to our audiences, you know, you're thinking about things differently, independently and objective, objectively. And that leads into what we're going to do today, because we're not going to follow our typical format. Since you've already been on the show. We know we've seen under the kimono, and we know your worst investment ever. So it's probably better to talk about what's on your mind these days. So what are some issues that you're thinking about right now?

Kirk Chisholm 07:48
Yeah, so I'm gonna give you two points here. Actually, I want to talk about follow up from what you just said, and then we'll get into what's on my mind. So the one thing that I found, because I work, I talk with a lot of institutional money managers and people that you probably run in those same circles and are, you know, they're really smart people. They're probably some of the brightest people for what they do, you know, in their field. And yet, they don't think outside the box. So I have to ask myself, Why? Why are people who are so smart, not doing something different? Why are they not looking at this the way I am and seeing what I'm seeing? And if they are, why aren't they doing it? So you know, I've grabbed lunch with a bunch of them and kind of explained a few thesis and say, What do you think? And, you know, they'll talk to me, and they'll say, oh, yeah, no, that makes perfect sense. Like, so why aren't you doing it? Like, well, we can't, like, why not? Well, here's, you know, they actually wrote a blog post about this a few years ago, because it was just so obvious. It's called career risk. So if you think about it, if you're a portfolio manager, you're managing a billion dollars, and you're making, I don't know, half a million dollars a year, or maybe you're making a million with bonus, whatever, you make a lot of money, right. So what's your incentive to do a lot better than the index? And let's say you're a large cap growth manager, right? What's your incentive to do a lot better than the index? Well, okay, the incentive is, hey, if the if the index goes up 10% I make 20%. I get a nice pat in the back and I get a little bonus. But what if you're in your pursuit for outperformance you underperform let's say you miss the ball completely? Right? I mean, Jeremy Grantham is great at this he's great at picking bubbles but he's he's also great at being two years too early. Like consistently like he's literally like two years too early every single time but he's right. And almost so that I every time I see him talk about a bubble, it's like alright, let's start the clock. But, but the other side of is if you're wrong, so let's say Kim, right, he talks about this he, he had his firm, they, they called the bubble and 90 Seven for the tech bubble. And they subsequently lost 40% of their firm's assets, because they got out of the tech sector, because everyone else was following it all the way up. And he subsequently grew the firm a lot after because people like, wow, this guy's really smart. But his career risk grant, it was his firm. But if he's a fund manager, you can't do that. Yeah. Because if you get a nice bonus for being right, if you're wrong, you get fired. So what's the incentive to do anything but hug the index. So when people reinforce this, this, you know, this thesis that oh, all fund managers, they can't do better in the index. They're not trying, they're literally trying to hug the index somewhere close to it, so they can keep their job and keep getting a bonus. They're not trying to beat it. So

Andrew Stotz 10:50
they're not even trying, yeah, do their job there.

Kirk Chisholm 10:53
I mean, you've seen some of these portfolios, some of them are like, 30%, in the spy? How can you not be trying to hug the index, when, like, a third of your portfolio is in the index you're trying to match? Why don't you just buy 100% of it, like, you know, whatever. Like, that's basically what they're doing. So I just wanted to point that out. Because I think it's really important. You know, when we see certain things, and we have a narrative given to us, that narrative is not always correct. In this case, people say, Oh, they can't outperform because of the fees. It's not true. A lot of them could easily outperform. But then they're also subject to the possibility they could underperform. And they're not willing to take that career risk. It's not a portfolio risk. It's career risk. So the difference there, and like I said, this framework goes in a lot of different directions, right? It applies to everything. So you have to understand why things are happening. So I just wanted to point that out. Because I think it's it's a really important framework that people need to understand with portfolio managers, and just how the industry operates. No one will tell you this, but this is really what behind closed doors, people will tell you. So I want to start there. I know I do want to get into the other issue, but I don't know if you had any follow ups in that.

Andrew Stotz 12:04
No, I mean, I think that's definitely having been a an analyst, my whole career talking to fund managers across the world. You know, it's only a very small number that are willing to really make a big bet. And I think that's also let's go back to capitalism. One of my favorite topics, the beauty of capitalism, is that it sets the political environment allows capitalism, because capitalism is one of the best way to allocate resources. And, therefore, to allow capitalism to work. You have to make sure number one, you don't get monopolies. And you provide the framework, the infrastructure needed for your economy, for new entrants to come in. And this is free market capitalism, and who are the people that are willing to take those risks? It's those new entrants, now they're going to lose, you know, some of them are going to lose, but it's those people that ultimately are taking the big risks. It's not Vanguard, it's not BlackRock, it's these people. And so capitalism also brings us the willingness to take risk. And the bigger you get, I think, the you know, you're, you're seeing career risk. So true. So, three, cheers. For capitalism.

13:28
Three cheers for capitalism. They

Andrew Stotz 13:32
were talking about shareholder capitalism, non stakeholder capitalism.

Kirk Chisholm 13:36
Yes. I kudos to you on that one. I fully support that as well as your posting made today. People who didn't see it, you should it was, it was phenomenal. So

Andrew Stotz 13:46
what else is going on your head?

Kirk Chisholm 13:48
So there's a real big topic that I want to talk about. And I think it's really important, because, you know, when we look at the world, like I said, we try to see things differently. You know, like Steve Jobs, think differently, kind of marketing, we think that way, right? We're trying to think differently than everyone else. And most people come to, I would say, all of us, right? And this is how your brain works. We come to our opinions by someone else giving them to us. And you might say, No, I think independently, that's actually not true. What happens is in your brain, you do something, and then your brain justifies it afterwards. And you think, Oh, well, that's why I did it. No, you just did it. And then your brain justified it. And if you have an opinion, most likely, if you're watching the news, you have an opinion, because somebody gave it to you. Now, I don't mean to insult every single person who's listened to this podcast, but that's human nature. I'm not I'm not judging. I'm just saying that's how our brain works. And you didn't understand how it works, because that will help you look at the world differently. Because if you know that your opinions are pretty much given to you or formulated through means other than independent thought, then it'll help you be more comfortable with the fact or mindful of the fact that, okay, now I can see the world in a different lens, because I'm not, I'm not fighting against the tide that I don't see. Right, you're actually seeing the world with a lens that's more about reality than we think it is. So here's a framework that I think is really hard to grasp. And we started talking about this on our show about, I would say, about six months ago. And it actually took me about six months to really wrap my head around this new paradigm. So there is a paradigm shift going on the markets. And most people either don't aren't aware of it, or they're not respecting it. And what's important to understand this is why it took me so long to like, get the word out, and to even put it into words that I could explain to people because it's so complex. But yet, at the same time, it's so easy. And I'm going to explain the simple concept here. And then we can enter you and I can kind of dive right in. Because it's a big, it's a big topic, and it warrants a big discussion. So before, here's the framework. For the last 40 years, we've had declining interest rates and declining inflation, right, starting in 81, was where it peaked. In the US, at least I know other countries are different. But in the US, we had interest rates and inflation peak in 81. And they've gone down for 40 years. Now what's happened in 40 years? Well, we had a huge bull market and bonds, huge bull market in stocks, huge bull market, real estate, pretty much everything, the whole assets across the world, we're in a bull market the last 40 years now I know, there were you know, fits and starts for some of them commodities didn't do as well recently. But the point I'm making is that you had growth, asset, wealth, creation and abundance across the spectrum for the last four years. And in large part, that's because in 81, there were 20% interest rates. So you're not taking a lot of leverage at 20%. Right? If you want a mortgage, you're gonna pay a lot less for that house, because you can't afford a 20% mortgage on a million-dollar property, maybe you can only afford a $200,000 property. But back then there wasn't as much leverage in the system, okay, because of high interest rates. But as soon as industry started declining, all of a sudden, people said, hey, I can get a mortgage, and I can make good cash flow, because interest rates are declining, right? Or I can buy bonds, and they're gonna start making money. And just really quick, do you know what the best performing asset class was from pretty much at one and for 30 years? You know, what the best performer was?

Andrew Stotz 17:38
I'm gonna say, bonds, because I know, equities had some pretty big ups and downs over that time. But what was it?

Kirk Chisholm 17:46
30 years zero coupon treasury bonds? It was almost double the return of equities.

Andrew Stotz 17:52
So the largest the longest duration, first of all, meaning that so yeah, the most risky and that means it is the bond that benefits the most if interest rates fall. And if they can consistently fall, then this is the bond that's going to increase in price the most because of that duration. Okay, continue.

Kirk Chisholm 18:11
Yeah, I mean, you were making 16% a year, they weren't doing that in equities. So the point being is that's something that people don't think about. But so if you think about this visually, right, you've got a balloon, right? My hands are this balloon. And as interest rates fall, it allows leverage to happen because you can borrow more, right? Because your payments are declining, so you can borrow more, right? Yep. Okay. So the economy gets a little bit bigger, right? The balloon increases. As interest rates decline, it allows more and more leverage, it allows the balloon to keep getting bigger and bigger until last year, when we had 2% 30 year mortgages, and pretty much 0% borrowing rates for public companies just crazy mean high yield bonds or what 3% I mean, I can't even imagine but but the point is, is you get to this maximum capacity, where it can't really go anymore. Because where you're gonna go, you're gonna go negative, and then in then you get into this, this math problem. But the point is, we hit that we hit that wall. Yeah. And now, what's happening as interest rates are climbing. So we're reversing what happened in the last 40 years. So most people, you and myself included, Andrew, we grew up in this abundance period where everything was great, and everyone made money and buy and hold work and all these things were great. All these you know, these Wall Street adages that helps you make money worked until the paradigm changed. And what we've seen this year is the paradigm has changed. And most people think, Oh, it's just inflation with the federal just low rates. No, they can't just lower rates. When you have low inflation. You can do a lot of things. The Fed can be a hero, they can build the economy. They can't do that right now. We have inflation at eight and a half percent. And if it goes down, maybe they do, but we were so far behind the curve. We have to get close. to eight, in order to even moderate what inflation is doing, and we're what three, I mean, it's it's, it's ridiculous to think about how people are looking at this issue and the impact it's going to have. So it Wall Street is not pricing in the risk. They're not pricing in the Fed doing anything but lowering rates of January. They're, they're missed. They're misunderstanding the Fed right now. So the point I'm making is you had this bubble, which is now shrinking. But what what else was what else happened when it was expanding? Wealth Creation, what happens when it shrinks wealth destruction, right? And it doesn't mean it's going to be a crash, it just means that real estate, maybe hit a peak, maybe a house hit a million dollars. And you know, I mean, look, if you have a, let me give you some perspective for real estate. If you get a 2% 30 year mortgage on real estate, which some people did, we're lucky enough to get on a $700,000. Mortgage, that's $2,500 a month. If you hit seven and a half percent mortgage rates, that monthly payment doubles to 5000 a month. Well, you could say, Alright, so what people are paying more, yes, but people buy in affordability, which means your affordability is still 2500 bucks a month, which means your property that you can afford is now a $350,000 mortgage, which means that, you know, everyone else is in the same boat, which means property prices are going to decline by directionally 50%. I'm not saying a percent, but directionally that's where they go. It won't happen overnight. It'll happen over years. But that is a good overlay an example to look at the whole economy, because the whole economy works the same way. So if you look at inflation, and leverage, to understand the direction of where things are going, I think it'd be a better marker for your other decisions, knowing that inflation really is bad. If you're not prepared, then, you know, you could be up the creek without a paddle.

Andrew Stotz 21:59
So let's, let's put some, let's go back and recap what you're talking about. And I want to put it in my own context. I left Ohio, where I grew up outside of Cleveland, in a little town called Hudson, I left Ohio in 1985. And so we had already gone through Volcker raising interest rates and you know, trying to, you know, bring inflation down. And so we were already in that process. Now, I moved to California, and then I moved to Thailand. And basically, that's kind of what what was happening was that jobs were leaving America, particularly Ohio. Now, if I go back to Ohio, it's a very different world. It's hollowed out, those jobs went to China, you know, huge volume went to Asia and China. Now, when you have roughly let's say, 600 million people, five, and let's say 500 million people go from working in farms to factories, and they work at a very low wage, which is a great wage for them in that factory. It's, it's an impossible, it's an impossible wave to overcome. And as a result, we had huge deflationary pressures that came from this, let's say 500 million, no, we're not talking about counting Vietnam, Bangladesh. You know, in other countries like Thailand that brought probably about 700 million new workers into the productive workforce away from, let's say, agriculture, there's just impossible to deal with that wave. So you have a deflationary wave that's coming from labor into the markets. Now, when we're talking about China, the cost of Chinese labor is very high now. So that's the first thing. The second thing is when Volker started really squeezing, and tried to control inflation, it also led to a multi decade fall in oil price. And oil has a major impact on costs throughout the economy. So between the labor market and the oil price fall over a long period of time, you could argue that, you know, it fed that 40 years of declining interest rates, and that was driven ultimately by declining inflation. But it's over. We've already seen the spike in oil that happened in 2008. We're seeing oil again. But more importantly, there is no more massive labor force that's going to come in at a lower rate. And that is my kind of recap of what you've just said that the paradigm was the 40 years. That's a little little story about the background. So what's next? How do we use this information to think about what we do? Okay, you got to get your mic on.

Kirk Chisholm 24:40
Sorry about that. So Andrew, you actually brought up a great point. And I want to kind of mention this, I'm trying to break this into bite sized pieces because the concept is really broad and complex. And like I said, it took me six months just to wrap my head around, and all the implications. So what you mentioned is really important. Um, when we're talking about inflation, so I remember 2008 2009 2010 You know, every perma bear was out there claiming that the that the world is going to end the dollar is gonna go to zero we're gonna have hyperinflation because all the money printing yet. That didn't happen. Why? Well, very simply because the deflationary forces that you talked about, of globalization, overpower the money printing, yep. Now I look at the Fed, and most people look at the Fed and say, Oh, they're printing all this money, it's gonna, it's gonna cause the dollar to go to zero. That's not true. So what the Fed does is, if you think of it this way, right? You think of like, you know, the money supply and the velocity of money, you know, it's on a trajectory, whatever the trajectory is 3%, or whatever it is, it's a pretty, pretty even trajectory. If you look at history, they keep it very smooth. But then, you know, 2020 happened 2008, you hit a speed bump, right? It goes down. So the Fed prints a bunch of money. And what they do is they're basically filling in the pothole, they're smoothing it out. So they're not creating hyperinflation, because they're not trying to, they're trying to fill the gap. And so that's why you have this smoothing effect with, you know, with these metrics. Now, with globalization. We've had globalization for at least the last 20 years, like a strong way up until Trump when he changed policy. And I think, you know, people argue whether it's good or bad idea, I think, in many ways is a good idea. But, you know, it obviously had some downside effects too. So there's, there's no really true right or wrong there. But either way, we're going in the direction of D globalization. Now, what globalization did, globalization allowed us to outsource our inflation to other countries? That's the simple way to explain it. We did have inflation here. But it was outsourced to China to Thailand to India, we outsourced it, because like you said, there's lower labor, so we didn't have to pay more yet, when, in the last few years, when that started to reverse, now, all of a sudden, we're hitting inflation, because you have to pay more, you have to there's manufacturing onshore, instead of in China, well, you gotta pay for that, you know, gas prices are going up by, you know, oil prices I tried to stay away from because it's a political commodity. But let's just stick to the straight stuff, right? Just goods and services, food, right, everything is going up, because you have to pay people more to actually do that job in the US, right, as opposed to some other country.

Andrew Stotz 27:22
So can we go back to a second? So what you said about, we kind of exported inflation, let's just make sure that we're really clear on that. So let's say that what that means, would it be correct in saying that, a Chinese, let's say, a person in China, who was working in a farm went to work in a city, they worked in a factory and their wages were rising fast, and they were making good money? From their perspective, and the cost of things around them are probably rising pretty fast, too. So they are inflating in their income and their spending? And would you say that, is that what you mean by we exported our inflation? Or what do you mean by that?

Kirk Chisholm 28:06
Yeah, so if you look at our inflation for like, the last 20 years, and look at China's China's been what 7%, give or take, you know, around there. So if you think about this, right, so I'm making a widget here, okay, I can pay somebody $50 an hour to make a widget here. Or I can pay somebody $5 an hour in China to make a widget there. Okay, I'm simplifying this no, there's more inputs, but let's just say that's it, right? So I can make that widget cheap. Because I'm only paying five bucks an hour. So instead of me charging, you know, $100 to the widget, I can charge 10, right, and my competitors are going to charge 11 or nine, and I have to compete with them. But I have this lowest cost goods. So if you remember, and during the 70s, you know, there was like one TV for the whole household. You know, those one pleasure, I read a book that talked about plungers. The only reason I mentioned it, but they said there's one plunger in the whole house. Now you got one in every room, you got a TV in every room, because we were able to get things so cheaply, because we outsourced our inflation, our labor to other countries, which allowed us to make the goods cheaper.

Andrew Stotz 29:13
That was our inflation in let's say, in the US, inflation was written down. But in other countries where that money was flowing, it was what let's just I'm visualizing it, like all of a sudden, a good that used to cost $10 to make all of a sudden had a boom, it just fell to $1. And then from $1 It started rising pretty fast over the last 1020 years until now, making that and also the standard of living and wages and stuff stayed stagnant in America. So all of a sudden that $10 item that used to cause $1 in the in in China now costs about $7 to make in China and maybe $8 to make in the US.

Kirk Chisholm 29:55
Right? And so so getting to that point when I say we owe sort of store inflation to China, like you said, it increases the standard of living there, people can get paid more, it costs more. And eventually, their economy keeps increasing, as it has like 778 percent a year over many, many years. And we've outsourced our inflation. But now it's going to reverse because we're not going to be producing as many goods there because things are higher. So they're gonna have less demand, which is going to be deflationary for them and inflationary for us. Right. So if you think about, it's like, you know, it's like a balance, right, you have this, this, this balance, and when one side goes up, the other goes down, there's not any more water in there, there's just going from one side to the other. So it has to balance out, it just means that sometimes one is higher, but eventually, they kind of, they come to an equilibrium to the point where the US doesn't have to outsource to China, because it's the same cost. And then they, they put everything on shore. But all of this is problematic, right? Because now you have to retrain people, and now China's got a deficit of of need for goods. So you got all these problems that happen, but, but understanding those trends is important, because if you understand what's happening, everything else will be crystal clear, you're gonna understand those trends, it's gonna be really hard to understand this.

Andrew Stotz 31:14
So let's wrap up this discussion of the prior, let's call it the prior narrative. And that is the prior story is that we've had 40 years of declining interest rates, 40 years of declining inflation. And there was not much that really the Fed or anybody could do about it. There was deflationary forces that were overpowering money printing, and that we sent our inflation abroad, and wages and other things rose in other countries. While that we were enjoying in America, let's say cheaper prices. At the Walmart as an example, it was driving down prices in the US. But now we can see I can see here in Asia, that the wages are definitely much, much higher. And all of a sudden, we're getting close to an equilibrium. So how do we take that information and think about how do we invest going forward?

Kirk Chisholm 32:02
Yeah, so, you know, this is probably not the most rosy, sunny, Rainbow and sunshine kind of opinion here. But, you know, I think if you think about, I think of this, you know, we talk about a balanced scale, right? Or I think about as a balloon, right? What you know, or think of as gravity, what comes up must come down, right? So we had this great wealth creation, this big balloon, and now it's deflating? Well, what you basically can reverse everything that happened. So abundance turns into wealth destruction, right? Deflation turns into inflation. So you can reverse. So I always think about it, like, everything you think about, you know, about investing is now wrong. Right? Because all the assumptions you made, were based on this 40 year assumption, look at the 6040 portfolio. Oh, it's done great over the last 40 years, what would it do before that? Right? Nobody talks about that. They always kind of cut it off right at that point. But the point I'm making is all of the things we think we know all the assumptions, all of the predictions are based on a certain assumption that's wrong. So how did 2008 happen? Well, in large part, it happened because we made an assumption that real estate always goes up. And that was wrong. And the whole system imploded because of it. So we always have to check our assumptions, we have to reassess. Is this assumption Correct? Am I thinking about it properly? And if you understand the inflation part, and most people don't, I will tell you people who are experts in inflation, misunderstand it. They were saying that we were gonna have hyperinflation the early, early 2000 10s. And they were completely wrong. And they've been saying it for 10 years, and now they're going to be right. They're like, Oh, look, I was right. But they don't understand the impact and why it is impacting way it is. So if the listeners understand this, you're gonna be you're gonna be so far ahead of everybody. You know. So if you think about, you know, what does well in in flat, or even deflationary times are what did well, in the last 20 years, got the last 40? Let's say last 20? Well, real estate did great. Bonds did great. Equities did great, right, you know, commodities. So so but but those did great, right? So let's reverse it. What is going to be the opposite of that? Well, bonds are obviously doing terrible this year, worst year, in 40 years. They're doing terrible. I don't expect that's going to change as long as inflation is high and interest rates are climbing. So bonds are pretty much you can pretty much throw them out the window. And I know that it's going to scare the regulators and the risk managers and all the people who held their assumptions that risk management happens in a certain way. And I will tell you flat out it does not happen that way anymore. Putting together bonds over

Andrew Stotz 34:41
folio major upside for bonds.

Kirk Chisholm 34:45
Bonds from these will hold on to bonds when we went from the safe investment to the risky investment. Talk about screwing with people's portfolio. People looked at bonds as safe put your age in bonds. That's the best way but the reality is is some When he was, you know, 70% in bonds, they're gonna lose their shirt. You think about how much money was made when bonds dropped, wait till they go up, I mean, wealth is going to be destroyed on it in the bond market, as you know, is a huge market. So where's that money gonna go? You know, so I have not owned bonds the last three years not gonna cash cash is safer. You want to be short term. But anyway, we'll move on from bonds because I think could go on for an hour. The equities. So equities have another problem. Right? So equities. If you look at the last two years, right since COVID, right COVID, markets went down 33%. And technology skyrocketed. The Fang stocks pretty much and most technology skyrocketed went up like 100%, in some cases, in a matter of two years great performance. But the problem is, is a lot of technology, a lot of IPOs, a lot of Spax a lot of these more speculative investments rely on cheap money. Now, personally, I don't always see how some technology companies are going to be impacted by this. However, it doesn't matter what I think, because the market looks at everything with a broad brushstroke and say technology bad, industrials, good, we're gonna sell tech, so even if it's a good company, it's still gonna get sold. So, you know, I look at it and say you got to stay away from the growth areas and focus more on the value areas, because value tends to do well in recessions, it doesn't mean you won't lose money, it just means you'll be safer. So if you have to own equities, own value, and own, you know, more conservative value things like me, the problem is things like REITs, and utilities are gonna get harmed too, because their yield plays. And if the, you know, if interest rates are going up, they're gonna get harmed too. So there aren't a lot of safe places, this is part of the problem. Then real estate we talked about earlier, real estate's really dangerous. So and it's illiquid to boot, which is biggest problem. So you know, I remember what happened in the early 2008. Period. If you didn't get out early, you couldn't sell. And then you had to wait, whatever it was eight years to get back to where you started.

Andrew Stotz 37:05
And let's talk about real estate for a second. I mean, there's different aspects of real estate. So we have REITs, that are one form of real estate, we have, you know, people buying their own homes, which is another kind of real estate investment. And then which is subsidized by the government, given the very low interest rates that because of Fannie Mae and Freddie Mac also, you know, provide a huge amount of subsidy in America that's not provided in other countries. And then the third thing is, let's say raw land, you know, so are those things, should we think about all those things the same? Or if somebody says, I don't own any real estate? And is there any value in any of those three, what would you say?

Kirk Chisholm 37:47
So each one is going to be different. And I'll kind of walk through each one and why residential real estate, I know, I'm scaring the crap out of your listeners with real estate. And if you're an investor, you should be scared. But if you're a homeowner, and you don't need to move in the next 510 years, you have nothing to worry about. You really your mortgage is locked in your payments are locked in, as long as it's fixed and not variable, you have nothing to worry about. We could go to 50% interest rates, you're fine. It doesn't matter, right? It only matters when you sell. Now, if you're gonna move in the next five years, you should probably sell now. You know what I did? I sold and I'm renting because I see the opportunity set to buy really cheap in the next five years. So that's my strategy. It's not for everybody, though. So residential, I think is hard because it's a personal expense. And so sometimes it's not about the investment. It's about where you want to live. Now that's residential, if you look at commercial, if we have a recession commercial is going to get dinged it already has from COVID. I wouldn't touch commercial, if you industrial should do. Okay. They started they've done well in the last few years. And I expect they'll continue to do well. If I look at farmland and raw land, those are really interesting. Now, I don't like raw land because it's generally more illiquid. People don't really want it unless it's in a desirable place. So I tend not to like that. Although, historically speaking, raw land has done well in times like this. What I really liked those farmland so let's get into farmland a little bit so farmland is basically just land and you're you're producing crops on it one form or another. Now, we have high inflation, what tends to do well, commodities, commodities tend to go up in price. And oh, look, you're producing commodities on your on your farmland. So you should end up getting more money, more revenue from your crops. So farmland is good in that way. But there's actually a more subtle way that farmland is better. Now, if you look at inflation, right, and let's take maybe we have eight and a half percent, but let's say it's 10%. Just to make the numbers easy, okay, we get 10% inflation. Where is money created? Well, it's created by the government, and it's created by banks. So the people who will benefit the most and by side benefit I mean they'll lose the least off of this are people who are getting it firsthand from the creators of the money. So if you're a government contractor, you get paid first, before inflation takes hold, right? So let's say the government gives you money today, then throughout the rest of the year, you lose 10%. So your 100 bucks is now worth 90 bucks. Right? Now, at some point, you're gonna pay somebody that money, and they're gonna get it and they're gonna pay somebody else. But you got to first you got that 100 bucks at pre inflation prices, of what you can spend it on anything else you want. So people who are first to the trough getting paid from the government, are the least harmed by inflation. The other people were least harmed are people get money from the banks, which are typically homeowners business owners. You know, I mean, I don't know how much business owners will be borrowing, or how much they'll be lending. But those are the primary beneficiaries. The other primary beneficiaries are the people who are producing from we'll call it scratch, right? Producing goods like metal from a mine or, you know, corn from a farm, they will get the they will be able to take the goods pay for the production of the goods, getting it out of the ground, and then selling it later, at a higher price. But they're going to pay less to get that corn out of the ground. And they're going to make more later. So the producers of raw stuff are going to benefit also from inflation, not necessarily that they're going to take advantage of other people, but in the sense that they're not going to get harmed by inflation. So I love farmland. It's it's a great asset class, it's hard to find there's no, there's no great institutional, let me reframe that. There's a lot of institutional investors no great retail outlet for farmland that I'm aware of, except for two publicly traded companies.

Andrew Stotz 41:46
Okay, great. And so I just was going to share my screen and show this chart, which is, I'm sure for those people that are on Twitter, they see this chart, but let's look at this one. So this is Jim Bianco those posts that he's been talking about what's happening with the bond market. And here he's looking at total return of the bond, the globe, Bloomberg global aggregate index made a new low, which is down about 17%. Year to date, s&p has had an extraordinary bad year is down 17.5. And I believe that that's the global aggregate and he may have the US aggregate, I think, which is down 12%. So it's been carnage. And this really chart just opened up that chart shows how bad this year was. And part of my question that I have for you is that sometimes when you look at that type of a situation where we're down almost 17% Is now the time to buy. Or what do you do? That's a?

Kirk Chisholm 43:00
That's a great question. The if you think about the bond market, and this is actually one of those great questions that you really, no one has a great answer for. Yeah, I will give you my answer in its in the frame of a framework, right? Because I don't know the future. But I have been through this, this rodeo a few times. And I know what a bottom feels like. And I know what a top feels like. We're not at the bottom. So what I would say is this, have the assumptions changed. We're assuming that inflation is going to be a problem, and that interest rates are going to rise. Okay, are interest rates going to stop rising? Well, not for the next four months anyway, at least according to Wall Street's picks? I think it's probably longer than that. But Wall Street thinks, you know, four months. So in January, they think rates are gonna start to come off. I think they're delusional, but you know, that things will change. So I would say no, it's not the right time. If and this is the problem with the old paradigm, the old paradigm says, Buy and hold is a good strategy. The old paradigm says, you know, you can't trade it and on the market, cash is bad. You know, there's all these rules of thumbs that we have as investors, and they've worked for the last 40 years. They're great rules of thumb. They're what I call a half truth. Now, a half truth is dangerous. It's Ben Franklin said half truth is, is a great lie. And what it basically means is, let's take buy and hold, buy and hold works. Not going to argue that everyone who agree buy and hold works, except it doesn't work in a recession or a bear market. So it's not a great strategy. It's just a great strategy during a bull market. Right because it holds you accountable to hold on hold on tight even through bad times. However, did it work from 1929 until whenever I don't even know when it would reach the reach the same period, or did it work during 2000 to 2013, where you had 13 years have negative performance, or did it work in the 70s? No. So there are periods in time where it works and or period times where it doesn't. And you need to identify when that works. And when it doesn't work. Right now, we're still in the period where the Fed is tightening. And they're basically, and I'll give you another framework, and this is probably the key. This is the key question you should be asking yourself, of all the things I've talked about so far, right? We talked about inflation. What we have now is high and is moderately high inflation, I wouldn't call it high high as 15. But moderately high inflation, right at eight and a half percent. Now, if the Federal Reserve does nothing, let's say they keep rates low, and they just say, we're just gonna have a party, and we're gonna have Wall Street, the stocks are gonna keep going. But we have eight and a half percent inflation. If they do nothing, that eight and a half percent will turn into the 15 2050. It'll turn into hyperinflation if they do nothing. That's the worst possible scenario we could have. Everyone knows it, so it's not going to happen. Okay, let's let's all agree to that point. It's possible, but it's, it's virtually impossible. Unless people have completely lost their minds, or they're trying to destroy the system. It's the last option. Now, the other option is they could fight inflation. Right? So now, everyone wants to be Volcker. Right? They all want to be go down in history as the one who whipped inflation, right guy. Yeah, everyone wants to be that guy. Right? They don't, they don't want to be burns, they want to be Volcker. So the way that you can look at it is alright, the other scenario is they raise interest rates really sharply, and they come up to about eight and a half percent, or wherever inflation is, and they meet it. And they're like, alright, we're where we are, where inflation is, we're at least on target, like, maybe things will come and go, but at least we're in the ballpark, we will go into a serious recession, if we have eight and a half percent Fed funds rate, we will be in a serious recession, or maybe even depression, okay? Because we're so accustomed to things being perfect, that we're fragile, we have a fragile economy, and we're not resilient, which means things are going to fall apart as soon as things get rough. So that's the other scenario, it leads to depression, severe and severe recession. And that's not optimal. But that is a better scenario than hyperinflation, we go through a tough time we go through two decades of bad, you know, bad markets, at worst, right? Let's just say, you know, the Great Depression. So let's say we have a really bad time, but it'll save the system. Now, the Fed is trying to do both, and they'll end up doing either, so they're trying to split the difference and have a soft landing. I don't even know what that means anymore. But they're trying to split the difference. So what ends up happening is, there's one question if I had one question to ask the Federal Reserve, it'd be this. When you get put up against the wall, and you're forced to make a decision to save the economy or to or to fight inflation, which choice you're gonna make? That's the only question I need to ask. And if I know that question, I can tell you exactly where the markets going. Because everything depends on how they treat this. Now, I think I probably probabilistically based on just people, they're going to choose recession, he's already said that we're slowing demand, which means a recession in fed speak. So they're trying to put us in a recession, because they think that will slow the demand, which should slow inflation. So what they're doing is, technically, you're academically should work. But who the hell knows. Right? The system is the system like you can't predict the markets but but I will say that if you know that one thing, it will help put in perspective, everything else. So until we start to see them easing, I'm on the sidelines, I am not taking any risk in any asset because it's not worth it. Okay. I mean,

Andrew Stotz 48:55
let me, let me just recap what we've gone over and then maybe think about, I'm gonna ask you the kind of the final question will be like, how should people be positioning? We know, you're not the advisor of anybody listening to this, and neither am I. But we can talk generally about what we think. But before we go into that, let's review some of the things that we talked about, you know, first, we talked about career risk. And the fact is, is that most people who are active fund managers are in fact, incentivized to hug the index because they're gonna get they're gonna suffer if they underperform. So that was a good point to understand. A second thing that you said was that we are given our opinions. Hey, wait a minute, I thought I had an independent mind. But basically, what you're telling us is that, you know, we've given our opinions by media or whatever else, and then we justify them afterwards. I thought to myself, maybe we're talking also about hindsight bias, not really being able to see what happened and then I'll add into that I like to think about like a billboard, I remember there's this billboard near my park. And I thought to myself, I don't want to see that billboard. I don't want what they want to put in my head. So I just imagined that billboard is black when I walk past it. And I just think, sorry, you don't get a spot in my head just because you're there. The next thing we talked about was I'm going to call it kind of the prior narratives, the prior paradigm, we talked about 40 years of declining interest rates, declining inflation. And we said that there's not really much that the Fed could do, they did a lot of money printing, but deflationary forces overpowered that. So we never got the inflation in the US. But that inflation was exported into places like China as an example. And then we talked about asset classes. And we talked about real estate about bonds about the markets. And you kind of highlighted Well, I think this is an important part that you highlighted said, if you own a house right now, and you have a good interest rate, you got a 30 year fixed mortgage, that doesn't happen the rest of the world, it mainly happens in the US sit tight, you're fine, write it out, don't do anything, you're in good shape. It's a little bit like getting a bond. If you hold it to maturity, you get the yield that is originally promised. But if you talk about commercial real estate, if you're talking about industrial real estate, well, you prefer industrial real estate, and then you talked about raw land, particularly farmland. And then I was thinking about the idea of, you know, if you're developing growing mining natural resources, that you should be good, whether that's growing natural resources that's like food, Soft Commodities, or whether you're mining. And finally, you talked about bonds being still unattractive, don't it's not an attractive place right now. And when it comes to equities, mainly, value is probably the best place but equities is not particularly great. And then what I want to just highlight is what you said. And that is, you know that people have a lot of half truths and stuff. And you talked about owning, you know, having cash, Hey, I just have a lot of cash. And that's, that's against the narrative, you're not going to have a lot of cash as opposed to be putting it in something. But I would say in my summary, I want to ask you, how should a investor, position their portfolio and one of the things I'm hearing number one, in your case, if you got a chance to sell a property into what is still a pretty high market, take that opportunity and rent for the next five years and see what happens. Number two, if you had the opportunity to hold cash, and you're not punished by something like your company, if you're a fund manager, then take the opportunity. Cash is not trash when everything's falling. What else would you add to either that summary of what I think I've captured what you said, and what you would tell people are the most attractive things to do with their money right now.

Kirk Chisholm 52:56
So the last thing I would say that I think is a really important framework to tie on to this is we call it outcome based thinking versus scenario thinking. So we as human beings, our brains work as outcome based thinking, who's gonna win the election? What's the market going to do tomorrow? What's the weather going to be like? And we all have our thoughts. We all think we know what is going to happen, the news tells us or whatever it doesn't, the truth doesn't matter. But the point is, we all look at the world in a binary way. Here's the truth. Here's what's going to happen. I'm comfortable with that move on. The problem is, if you have that binary thinking, then you're going to miss out on tons of opportunities. Right? So let's just take the last presidential election, you know, Trump versus Biden. So scenario thinking is different, right? binary thinking or outcome based thinking is I think Trump's gonna win, or I think Biden is gonna win? Well, I don't know if he's gonna win, because I can't predict the future. So what are we going to do if Trump wins? What are we going to do if Biden wins? Or the third scenario, which was very possible? What do we can do if it's unclear for a while? So we look at the different probable scenario and say, Alright, how are we going to handle this? How are we going to invest? Right? So we have, in the back of our mind, we have a plan of how we're going to invest regardless of the outcome. This isn't an emotional decision. It's totally unemotional. It's, How are we going to handle this? You know, like George Soros lost a ton billions of dollars by betting against Trump winning against Hillary, but even even then, like, because he was, you know, anti Trump, or whatever you want to say. But either way, he closed his position out pretty quick. He still lost a lot of money, but he closed it out. Right? He's a smart guy. He's probably one of the best traders of our time. So he got out quick, but he's still lost money, because he didn't, I would imagine, I don't know his portfolio. I would imagine he didn't take the other side at all. However, so the way to look at is is and I'll bring this into a current framework where you can apply it to your portfolio. So today, we're in a position where my claim is that we're going to have worst times ahead of us. Now, does that mean that it's going to be worse forever? No, it's not, I think we might have a period of, you know, six to 24 months, where the markets probably going to get progressively worse. And then we're going to hit a period. And it's gonna be like, Oh, great, everything's really low, and people are just going to bottom fish, and it's going to bounce up. For whatever reason, I could speculate, but I don't know. But point is, if you look at the 70s, I think that's a really good marker of what's probably going to happen to us. Because the, the inputs are similar enough where you can, you can overlay a lot of human nature and see this is probably what's going to happen. So what that means is, there will be good buying opportunities in the next few years, if you're patient. And if you're patient, you just buy, you just put together a laundry list of what you want, and you just buy everything you want. And then the markets gonna go up. And then you can decide whether you think that the storm has passed or not. I think probably we got a few waves of those, we probably got a few buying opportunities in the next 10 years. But basically, what that means is most likely, stocks are gonna get cheaper, maybe not on a nominal perspective, because if you look at the 70s, this is an interesting stat, which you might appreciate. And in the 70s, the lowest point was, I think it was 72, or I think was 72 was the low point. That was the low point nominally. But it wasn't the valuation low point. The valuation low point was I think, in 81. But yet the price the nominal price was like 30%, higher, but stocks themselves were cheaper, because what you were getting for what you paid was a lot more. So basically, these companies kept growing, but the value but the stock price didn't, didn't go along with it. So my point is, is understanding how that could happen means if this is dragged out, you could find some tremendous deals, even if they're at a higher nominal price at a valuation perspective, you could clean up I think it was, somebody said they were like PE is of 2.5. In in one of these periods in the 70s. Like, do you imagine that 2.5 already bankrupt?

Andrew Stotz 57:01
Exciting. So I'm gonna wrap this up by doing a couple of quick references. First of all, okay, if you go back and you look at the track record of Warren Buffett, I would propose that he would be another good fund manager, money manager, if he hadn't had been through the 70s. The 70s is where he made a huge amount of money invested. And he also lost I mean, it was some of his worst years. But most importantly, it was some of his best years and his best investments. And then, of course, he allowed that money to compound over decades. Without the 70s and the exceptional returns that he got in that period of time, his long term return would not have been so high, let's just say the stock market. The s&p 500, after that period of time, according to his report is on his webpage was up by about 10% On average, annually for this period of time that he discloses his information. And then his performance was about 20%. He probably would have been about 13%, outperformance or 13%. So 3% outperformance which is great. And he would have been a very good fund manager without the 70s. And that. And the second person I want to references is Chris Mayer, who was on the podcast episode 249. And Chris wrote the story of the 100 baggers and has written some other great stuff. But the title of his episode is build a list of five quality companies and enter at the next market fall. And I think that that is how I would kind of visualize what you're saying is being forget the old paradigm, forget, you know, buy on dips and all that type of stuff. Just focus on getting cash, getting yourself prepared, because in the next 612 24 months, there's going to be opportunities. Is there anything you would add to that?

Kirk Chisholm 58:49
I think you're spot on? I think I would I would probably add that the list should probably be bigger than five, because Yeah, who knows maybe one of those five doesn't drop. I mean, I'm looking at the two farmland companies one dropped with the index, the other didn't move. So I was waiting for that thing to drop. That was my favorite one. And I gotta wait. So I think I would I would enhance the list, maybe even rank them in terms of priority. But I would have an expanded list of companies that you would own forever, because that's what we're thinking about a once in a lifetime buying opportunity, which, oddly enough, Andrew, I feel like it's happened four times in the last 20 years that we've had a once in a lifetime buying opportunity. But yet here it is, again,

Andrew Stotz 59:33
another lifetime. Well, I think that that is a great place to stop and I think you've given us a lot of good advice and things to think about. And I just want to thank you for coming on the show and also coming on a second time and sharing your wisdom. I just want for you to tell the audience where's the best place for them to go to get more of your knowledge and more of you know what you're talking about before we go those out.

Kirk Chisholm 1:00:00
Yeah. Thanks, Andrew. And once again, thank you for having me on the show. I love your show swam back. You do such a great job and you have such a unique perspective on podcasting. And once again, love your voice so yeah. So the best way to find me is, you know, money tree podcast.com Is my podcast. You can find me there twice a week I got an episode. If you're interested in you know, the wealth management part, its innovative wealth.com You know, just go there. We try to educate the public. I don't care if you do if you do it yourselfer, I love educating do it yourselfers I want there to be more. My goal much like yours, Andrew is, you know, I want to make a positive impact and over 2 million lives in the next five years. So if I can do that, that'll make me happy. And yeah, that's that's what I got.

Andrew Stotz 1:00:50
Fantastic. And we'll have links to that in the show notes. You can just go right now at the end of this show and go to money tree investing podcast and listen to some of the great episodes and great guests that Kirk has had and continues to have. And that's a wrap on another great discussion to help us create, grow and protect our wealth. Fellow risk takers. This is your worst podcast host saying I'll see you on the upside